Posted by Tim Burrell - One of the reasons for the decrease in the number of home sales in California, Florida and other high priced areas is the decrease in available financing.  The Triangle homes and houses in of the rest of the country are selling using loans that are associated with Fannie Mae and Freddie Mac, as they are able to stay within the limits allowed for those loans, so called Conforming loans.  The loan limit is $417,000.   Other loans are guaranteed by the FHA, with a lower limit of $362,000.  These programs do not do much for buying a home in California and Florida, unless you have a huge down payment.   But, those are the areas with an abundance of foreclosures.

Last week, an agreement was reached between the leaders of the House of Representatives and the White House to raise the Conforming Loan limit.   Some of the people involved in the agreement must not have taken good notes, as House Republican Leader John Boehner said they were raising the limit to $625,000 while House Speaker Nancy Pelosi said the limit would go up to $729,750, so the conforming loan limit for GSE's (Government Sponsored Entities)could be one or the other or someplace in between.  They were on the same page when they said that the FHA loan guarantee program would be expanded to a new limit of $725,000.  The increase in the conforming limit was supposed to be for one year, while the increase in the FHA guarantee would be permanent.

However, they forgot this thing called two house legislature, an idea that Thomas Jefferson, Ben Franklin and James Madison thought was important.  What about the Senate, the other part of the legislature?   Senator Richard Shelby of Alabama, a prominent member of the Senate Banking Committee, wants to tie the increase to the passage of legislation to increase the oversight of the GSE's.  That may work out, as the House of Representatives has already passed HR 1427, a bill that would provide for that increase in oversight.  Senator Chris Dodd of Connecticut, the chairman of the Senate Banking Committee, has stated he will support passage of legislation that would reform the oversight of GSE's and expects it to pass later this year.  So, if the Senate passes legislation similar to HR 1427, the oversight may come into effect, and maybe all parties will follow through with the increase in the loan limits. 

But, Senator Dodd wants to go farther by creating the Federal Homeownership Preservation Corporation, and fund it with $20 billion to purchase loans from lenders, allow homeowners to refinance into fixed rate government backed mortgages.  This proposal is designed to prevent foreclosures and allow more homeowners to keep their homes.   However, the White House does not want this added to the Stimulus Package, which is what Senator Dodd would like to do.

What will the White House do?  In the State of the Union Message tonight, President Bush urged the Congress to pass the legislation that would reform Fannie Mae and Freddie Mack, and modernize FHA.  He did not include anything about increasing the Conforming Loan limit.  He also urged the Congress not to add additional costs to the Stimulus Package, indicating he would oppose Senator Dodd's efforts to ceate the Federal Homeownership Preservation Corporation.  So, will the loan limit increase go into effect, or will it get bogged down in confrontation over the items in the Stimulus Package and reform of the GSE's and FHA?

If the Senate will get the oversight it wants and the White House gets the Stimulus Package it wants, then maybe  the House will get the increase in the limits it wants.  What will the nation get?

The National Association of Realtors estimates that if the limit of conforming loans is raised to $625,000, it will prevent between 140,000 and 210,000 foreclosures, as well as have a positive effect of 2 to 3 percent on home prices.   Those who oppose this legislation say it will  weaken the ability of the GSE's to help low and moderate income families.  Others warn that if this legislation passes and the conforming loan limits were increased, then it would increase the risk to the taxpayers just to benefit the wealthy.

Most Raleigh real estate can be purchased with the current conforming loans, and those Raleigh homes do not need the increase in the loan limit.  However, there part of the Raleigh real estate market that is slow is the part that is priced over $400,000.  So, increasing the conforming loan limits will make more financing available for that price range, which will help to decrease our inventory of higher priced homes.

The other benefit to increasing the loan limits will be to aid the markets in the areas with the largest amount of foreclosures.  If this decreases the number of foreclosures in those area, there will be less doom and gloom about the real estate market, and that will help all of us.

If the biggest problem with the economy is the lack of financing for real estate, you would hope that the politician would pass some legislation that would provide for more real estate financing, particularly for states like California and Florida, where most of the foreclosures are occuring.  It is only logical that if what we need is more financing for these areas that the politicians would provide that.   But, logic and government frequently do not coincide.  Lets hope they do this time. 

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