Mortgage Guarantee Limit Falls, World Doesn't End

More

Housing finance reform faced a key test this week and appears poised to pass

600 house cali REUTERS Mario Anzuoni.jpg

Last week, Congress quietly allowed September to end without renewing a key housing finance rule. Until October 1st, the U.S. government would guarantee mortgages up to $729,000 in high cost areas. That limit was permitted to decline to $625,500 as of Saturday. Supporters of strong government intervention in the housing market warned that allowing the limit to expire would be a disaster for the mortgage market. At this point, however, it looks like the private financing is will fill in the funding gap.

For a detailed explanation of how the conforming limit law changed, see this post. It's a little more complicated than simply lowering the ceiling for mortgages in high cost areas.

The mortgages in between $625,500 and $729,000 are considered part of the "jumbo" mortgage market. One company, Redwood Trust, has been securitizing jumbo mortgages since 2010. Jon Prior at Housing Wire talks to the company about how the mortgage limit decline might change bank's attitude towards these larger mortgages:

Mike McMahon, managing director at Redwood Trust, said the same banks that originated and retained mortgages higher than the previous $729,000 cap will still be writing loans above the new $625,500 ceiling.

Wells, Bank of America, JPMorgan Chase, and Citigroup originated $14 billion of these loans in the first quarter, and McMahon doesn't see that changing.

"They will continue to make such loans," McMahon said. "The world will not come to an end."

Housing finance policy reformers need to pay close attention to how the market for these mortgages evolves in coming months. We will probably see somewhat higher mortgage interest rates for these loans. After all, banks and investors who fund them will now face default risk. But after the initial uptick, we should see those rates relax a bit over time as those investors become comfortable again with these mortgages.

If this loan limit drop is a success, the government shouldn't stop here. It should continue to push down the mortgage limit slowly, and allow the private market to take over. But we can't force these mortgages on investors too quickly. After all, the housing market will likely continue to struggle over the next few years even with government support. But this conforming limit change shows a clear willingness on the part of banks and investors to stand behind mortgages.

Image Credit: REUTERS/Mario Anzuoni

Jump to comments
Presented by

Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.
Get Today's Top Stories in Your Inbox (preview)

CrossFit Versus Yoga: Choose a Side

How a workout becomes a social identity


Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus

Video

CrossFit Versus Yoga: Choose a Side

How a workout becomes a social identity

Video

Is Technology Making Us Better Storytellers?

The minds behind House of Cards and The Moth weigh in.

Video

A Short Film That Skewers Hollywood

A studio executive concocts an animated blockbuster. Who cares about the story?

Video

In Online Dating, Everyone's a Little Bit Racist

The co-founder of OKCupid shares findings from his analysis of millions of users' data.

Video

What Is a Sandwich?

We're overthinking sandwiches, so you don't have to.

Video

Let's Talk About Not Smoking

Why does smoking maintain its allure? James Hamblin seeks the wisdom of a cool person.

Writers

Up
Down

More in Business

Just In