What's Going On With Increasing the Conforming Loan Limit?

Update 2/12/08: See my post with more recent information here.

Original Post:
The mortgage market is in a state of flux, with multiple proposals floating around Congress regarding a potential increase in the conforming loan limit. That limit, currently $417,000, is the congressionally mandated maximum loan size that Fannie Mae and Freddie Mac--the largest players in the secondary mortgage market--can purchase. That helps keep rates lower for buyers in that bracket because there's an active place for banks to sell those loans. However, as many of you know, in this area that amount doesn't always buy much. An increase in the limit would make higher priced properties more affordable because a new and liquid secondary market would exist. (Jumbo rates, i.e., loans for more than $417K, run about 1% higher than conforming, though all rates change all day, every day, according to market conditions.

So what's all this about raising the limit, and what are they raising it to?

Nancy Pelosi first published that the limit would increase to $625,000 as part of the stimulus package. Then immediately she clarified to say that the new limit would be $729,750, an a similar (but permanent) increase for FHA limits. The difference is that the higher limit would be restricted only to certain high cost areas. Rep. Barney Frank then later added that the limit would be the lesser of $729,500 or 125% of the median home price, and only until the end of 2008, but for FHA any changes would be permanent. (FYI, the median home price for Washington's MSA according to OFHEO is $438,000, meaning our new limit would be $547,500 under that proposal) Other variations of the bill are floating around, disputes are ensuing, and some in Congress are saying any change needs to be part of a GSE reform bill.

The bottom line is that nothing is final yet, just as with the entire stimulus bill.

In related news, there have been several Fed rate cuts this month; first a 75bp emergency cut, followed by another 50bp cut this week. For those playing rate roulette, this last cut actually caused rates to increase, though they are still lower than a year ago. Read about why Fed cuts don't directly impact mortgage rates in my blog post here.