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| Temporary Loan Limits Will Help Few Markets |
| Written by Jonathan Smoke | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 02.12.2008 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Discuss this article on the forums. (0 posts) I’m curbing my enthusiasm for the stimulus plan providing much of a boost for housing. As politicians love to do, instead of simply raising conforming loan limits to a higher level, they targeted the temporary new limits to “high cost areas.”Translation—the bill that the house and senate have passed and will soon be signed by President Bush will raise conforming loan limits in only 31 markets. This conclusion is based on our calculations and interpretation of the bill. And besides being targeted at only 31 markets, this bill applies additional bureaucratic conditions that are yet to be fully defined. The new limits are temporary—only applying to loans originated between July 1, 2007, and December 31, 2008. By being temporary and selective, what was once simple—a single dollar limit—is now complex. Worse, rather than specifying the new temporary limits, the bill tries to specify how to calculate but leaves some question as to what basis will be used. Here’s how the senate bill described the new limits: “…the limitation on the maximum original principal obligation of a mortgage that may be purchased by the Corporation shall be the higher of—(A) the limitation determined for 2008 under such section 305(a)(2) for a residence of the applicable size; or (B) 125 percent of the area median price for a residence of the applicable size, but in no case to exceed 175 percent of the limitation determined for 2008 under such section 305(a)(2) for a residence of the applicable size.
(b) DETERMINATION OF LIMITS.—The areas and area median prices used for purposes of the determinations under subsection (a) shall be the areas and area median prices used by the Secretary of Housing and Urban Development in determining the applicable limits under section 202 of this title.” So HUD gets to choose the measure and area definition. Statements made by HUD officials indicate that they may choose the highest median value for a county within an MSA to define the overall median for the county (rather than the MSA’s median). So this more liberal interpretation helps a few more formal bubble markets get slightly higher limits. Here’s our best guess of those markets and values. We used the latest forecasted ending median prices by county for 2007 in all 361 MSAs in the U.S. Below are the MSAs that have new higher limits following these rules. Note that the top nine markets would have had higher limits but the 175% maximum limit kicked in.
If the temporary and complex nature of these rules does not constrain the impact of the limit changes, the narrow scope likely will. Almost half of these markets have minor increases in the limit—making the marginal benefit above the cost of managing this new complexity questionable. This will help New York, California, DC, Boston and Connecticut. It does not help other areas with significant foreclosure issues and home price risks. Permanently raising the limit to a single, easy to understand limit would have had a more cost-effective impact. 
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