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Friday, January 25, 2008

A little stimulus thank you.

As part of the economic stimulus package, an increase in the conforming limit could now be a reality, at least for a brief period. Congress and President Bush agreed, but have not voted yet, on a 1-yr increase in the conforming loan limit to $730K. There is not a lot of detail yet (there is confusion as to whether the $730K, or $725, is for high cost housing areas, or everywhere, and just what high cost areas are?). Just when mortgage originators everywhere were breaking out the bubbly, OFHEO's director James Lockhart (Office of Federal Housing Enterprise Oversight, who oversees FNMA & FHLMC) issued a statement saying "We are very disappointed in the proposal to increase the conforming loan limit as we believe it is a mistake to do so in the absence of comprehensive GSE regulatory reform. To restore confidence in the markets we must ensure that the GSEs' regulator has all the necessary safety and soundness tools. Yesterday Chairman Dodd talked about moving a GSE reform bill early this year.

Now what? Frankly, analysts feel that enactment is possible by mid-February but looks more likely by early March. No large investors will make any policy changes or announcements until the issues are less confusing, or even voted into law. Apparently, the bill would temporarily increase the limit on mortgages Fannie Mae and Freddie Mac may securitize from $417k to up to $730k. In addition, the bill would increase the limit on loans the Federal Housing Administration (FHA) may insure from $362k to $625k. This should help to reduce spreads in the jumbo mortgage market! One estimate mentioned that as many as $400-500 billion in loans could qualify for refinancing. As these loans refinance, it could ease pressure on capital-constrained bank balance sheets. And "temporary" items like this are difficult to rescind after a year, which would also be good news for originators.

Here in California Gov. Arnold Schwarzenegger wants Congress to raise the Fannie Mae and Freddie Mac lending limit from $417,000 to at least $625,000 as part of the economic stimulus package. State Assemblyman Ted Lieu is pushing for a bill that requires mortgage lenders to tighten up already strict guidelines to make sure homebuyers can afford their basic monthly bills before qualifying for a mortgage loan.

This bill would also ban certain designer mortgage loans such as the option arm mortgage. The option arm mortgage, also known as the pay option arm, allows borrowers to pay less than the interest that is due by adding the unpaid interest to the balance of the mortgage loan. The bill would also allow some homeowners to refinance their homes without being responsible for any penalties or unnecessary fees.

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