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Market Seems to Be Functioning Fine Despite Lower Limits

Presentation highlights how non-agency lending to fill in gap left by expired limits

Nov 4, 2011

By staff

While housing groups have been warning about the consequences of letting temporarily higher loan limits established in the heat of the market crisis expire, at least one scholar sees the private sector stepping in to fill the void.

In September, the National Association of Home Builders cautioned that the "fragile housing recovery" would be further damaged if super-conforming loan limits weren't extended.

"A drop in mortgage loan limits would reduce housing demand, and place downward pressure on home prices in major markets," NAHB Chairman Bob Nielsen said in a statement. "This would exacerbate the current housing downturn, trigger more foreclosures, impede job growth and endanger the fragile economic recovery."

Ron Phipps, the president of the National Association of Realtors, testified in May before the House Financial Services Subcommittee on Insurance, Housing and Community Opportunity that allowing temporarily higher loan limits to expire would reduce mortgage availability, have an even more dramatic impact on liquidity and halt the housing market recovery.

But the dire predictions so far have not come to fruition, according to Edward J. Pinto. In addition to being the former chief credit officer at Fannie Mae, Pinto is also a resident fellow at the American Enterprise Institute.

Pinto, who advocates the exit of the government from mortgage lending, explained in a presentation today that restoring the higher limits would only serve to provide a federal subsidy for affluent borrowers who are purchasing homes priced and between $800,000 and $1 million.

He presented evidence that the private market has stepped up to the plate to take on jumbo lending.

"Since the loan limits were lowered, there has been no evidence of adverse impacts on the housing market," Pinto said in his presentation.

He noted that overall home sales actually increased in September compared to a year earlier despite that lenders had already started implementing the lower limits in June and July. He presented a graph that indicated non-agency lending jumped in August as the private market stepped in to fill the void left by the disappearing higher limits.

Pinto suggested that the Menendez amendment, which would reinstate the higher limits, is flawed because it relies on 2008 home-price data even though values have plummeted since them.

"Weaning off the Fannie and Freddie addiction and retargeting FHA will be a long process, but that process should begin with allowing the temporary loan limits to drop," Pinto concluded. "While the reduction in loan limits affects few loans, a reversal will indicate that Congress is not serious about beginning the process of bringing back private sector involvement."

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