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What the Lower Conforming Loan Limits Mean

Making good on promises by policymakers from both parties, Congress allowed the $729,750 threshold for conforming loans with federal guarantees to expire Saturday, pinching high-end borrowers in a marginal number of counties nationally. Homebuyers looking for more than $625,000 in financing for their mortgage loans will accordingly fall short of insurance requirements under ""Fannie Mae"":http://www.fanniemae.com/portal/index.html, ""Freddie Mac"":http://www.freddiemac.com/, and the ""Federal Housing Administration"":http://www.fha.com/.

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How will the eligibility shortfall impact a still-fragile housing market? Despite the outcry from industry leaders and trade groups, few speaking with _MReport_ believe the return to old thresholds will hamper the recovery.

""I don't think it'll be a complete disaster at all, really,"" says ""Paul Dales"":http://www.capitaleconomics.com/staff/global-economics/paul-dales.html, a senior U.S. economist with ""Capital Economics"":http://www.capitaleconomics.com/. ""I don't think it will help when mortgages are hard to get, but the fact is that only a small share of borrowers will be affected. And those affected will be able to get a jumbo loan.""

He cites a ""Federal Reserve"":http://www.federalreserve.gov/ study that ""forecasted"":https://themreport.com/articles/fed-lower-fha-limits-for-jumbo-loans-likely-to-crimp-few-2011-09-23 that a significant shift would befall only 1.3 percent of current conforming loans with federal guarantees, with government data at odds over whether borrowers in anywhere from 250 to 669 counties would need to adjust for the lower limits.

Writing for ""_Time_ magazine"":http://moneyland.time.com/2011/09/30/conforming-loan-limit-shrinks-this-weekend-%E2%80%94-will-it-hurt-the-already-beaten-down-market/, ""Stan Humphries"":http://www.zillow.com/profile/Stan-Humphries/, chief economist with real estate Web site ""Zillow"":http://www.zillow.com/, said that ""the change is unlikely to rattle the fragile housing recovery.""

Confirming the Fed's earlier assessment, he said that only 2 percent of people applying to federally insure their conforming mortgages would ""fall directly within the impact zone,"" forcing only ""one in 133 homes across the country"" to finance their properties with jumbo mortgages as a result of the lower thresholds.

""In today's weak market, I don't think it makes that much of a difference,"" ""Gary Shilling"":http://www.agaryshilling.com/gary.html, president of ""A. Gary Shilling & Co."":http://www.agaryshilling.com/, an economics consultancy group, tells _MReport_.

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Asked whether banks could pick up the slack in conforming loans, he says that financial institutions ""seem to be saying that they don't want to make a lot of mortgage loans unless someone is prime... quality. The banks have so many problems being short of capital today that they are extremely reluctant to make any loans.""

Members of Congress had originally raised the threshold for qualifying jumbo borrowers to $729,750 in 2008 to boost sagging home sales and head off any further deterioration in the housing market. The expiration follows months of lobbying on Capitol Hill, which reportedly met stiff opposition from lawmakers and government officials in a new political reality.

Urging Congress to fix conforming loan eligibility at $729,750, the ""California Association of Realtors"":http://www.car.org/ warned in a June ""statement"":http://www.car.org/newsstand/newsreleases/2011newsreleases/loanlimits/ that any change would crimp some 30,000 Golden State homeowners with federally insured conforming loans and their families by raising down payments and interest rates for loans.

""Thousands of California home buyers will be shut out of homeownership,"" ""Beth Peerce"":http://www.car.org/aboutus/carleadership/bethpeerce/, the trade group's president, said in the statement, calling higher loan limits ""critical to providing liquidity in today's housing market and├â┬ó├óÔÇÜ┬¼├é┬ª essential to our housing recovery.""

""Congress must act now to prevent the loan limits from reverting to lower levels,"" Bob Nielsen, chairman of the ""National Association of Home Builders"":http://www.nahb.org/default.aspx, another prominent trade group, said in a ""statement"":http://www.nahb.org/news_details.aspx?sectionID=148&newsID=13447.

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

Not deaf to the calls for a fix in higher limits,
""Rep. John Campbell"":http://www.campbell.house.gov/ (R-California) and ""Rep. Gary Ackerman"":http://ackerman.house.gov/ (D-New York) ""co-sponsored a resolution"":http://www.campbell.house.gov/index.php?option=com_content&view=article&id=3046:release-reps-campbell-ackerman-introduce-bipartisan-bill-to-extend-conforming-loan-limits&catid=41:press-releases&Itemid=300032 in July to extend tenure for the $729,750 threshold over the next two years. The resolution ultimately died in the House, drowned by the political theater over debt-default ceilings and stopgap funding bills.

Despite analysis finding marginal fallout for the housing market, Humphries added a caveat in his _Time_ article by saying ""the change will [not] be painless.""

The economist outlined a scenario in which homeowners with conforming mortgages for a property worth $800,000, suddenly ineligible for federal insurance, will find themselves making monthly payments that amount to $67,000 over the life of their loan.

Wrote Humphries: ""I agree: Ouch.""

About Author: Ryan Schuette

Ryan Schuette is a journalist, cartoonist, and social entrepreneur with several years of experience in real-estate news, international reporting, and business management. He currently lives in the Washington, D.C., area, where he freelances for DS News and MReport.
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