Few home buyers will be affected, and the ones that are can afford a slightly more expensive loan
As October 1st grows nearer, realtors in places like San Francisco and New York City are beginning to sweat. Unless Congress acts before that date, the government will be unable to guarantee mortgages in excess of $625,500. Since 2008, it could back mortgages as big as $729,750 in certain high-cost areas. Legislation to prevent this decline in mortgage limits might not succeed by the end of the month, but that's okay.
For some background on the change that will occur, check out this post. I would suggest five reasons why Congress should allow the old limits to expire.
No One With a Mortgage Greater Than $625,500 Needs a Subsidy
First, let's think about who keeping the mortgage limit high helps: relatively affluent individuals. At this time, around 66% of Americans own a home. It's safe to say that this is approximately the top 66% most affluent. Now consider that the metropolitan statistical area with the highest median home price is Honolulu, HI, according to the National Association of Realtors. The median price was $607,600 at the end of 2010. If you consider that most banks will require at least 5% down, then this maximum median mortgage would be no more than $577,220.
What does this tell us? That at least half of the population of homeowners will continue to be able to continue to qualify for conforming loans. That leaves those no more than the other half of homeowners potentially being forced to obtain mortgages without the government's blessing. They would be the wealthiest 33% of Americans. In fact, it's probably an even smaller portion of the top than that, considering the generous approximations made above.
The question becomes: does the government really need to subsidize the mortgages of the richest one-third of Americans? It's hard to see why. Surely, these people will still be able to get mortgages without a government backing, either through a larger down payment or a higher interest rate. They can afford either.
In Many Areas, Prices Have Declined More Than the Limit Would Drop
The previous conforming limit was set in 2008 based on 2007 prices. Unless you've been in a coma for the past three years, you know that home prices have dropped significantly in many markets -- particularly many of the markets that boasted the highest prices in 2007.
In San Francisco, for example, from 2007 to 2010, the median home prices dropped from $804,800 to $567,900. I know, ouch. That's a 29% decline. Meanwhile, the conforming loan limit will fall from $729,750 to $625,500 -- a decline of just 14%. In other words, the average borrower is still better off with the new conforming loan limit than they were with the old one in 2008.
High-Priced Homes Are a Relatively Tiny Part of the Housing Market