Housing and Mortgage Crisis-Why Mortgage Loan Limits Should Not Be Raised

 With all due respect to Governor Arnold-ator, Congressional action to raise conforming loan limits is ill-conceived. First, in response to the notion that allowing the GSEs to securitize larger loan amounts will bring pricing stability to the market, don’t hold your breath. Given the pricing adjustments we’ve seen incorporated for conforming product over the last few months, don’t be surprised if the same translates into the Jumbo market. With Fannies announcement today that thei serious delinquency rate shot up 50% in November compared with a year ago, they’ve shown that they are no better equipped to manage risk than the rest of the market. Of course, having purchased nearly 40% of Countrywide’s subprime product in Q1 of 2006 might have something do with this increase. You think?

Second, even if pricing improves marginally (25 to 50 bps), how many more borrowers in California will be able to qualify? Not enough to make a difference to the free-falling real estate market, which still has a long way to correct itself in the most over-valued markets. Home prices are falling faster (in general) in higher-priced markets, which will translate to restrictions in some form when Fannie rolls out this product (either in the form of LTV and or price).

Third, Fannie is bleeding. The need to raise capital (late last year) suggests they are going to be bleeding for some time. We haven’t seen the worst of their losses/delinquencies, not by a long shot. Handing the GSEs additional authority is the equivalent of giving an alcoholic who is already in rehab a bottle of Scotch.

Finally, Senator Dodd is promising GSE reform as a follow-up to the increased loan limits, but excuse me if I play pessimist. If Congressional reform ends up resembling the wonderful job the SEC has done addressing the biggest issue of all - the fundamentally flawed relationship between the investment banks and the rating agencies - we’ll end up with another failed attempt at policy reform. Wouldn’t it be nice if Congress actually fixed the root cause of a problem first, and then thought about applying band-aids?

Come on now. Spring is around the corner. You never know, this could be the year the Cubies take it all.