So last week I talked a bit about the economic stimulus package, touching on the benefit of effectively raising the conforming loan limit for high cost housing areas.  The House has passed the bill as is, with the Senate being the final hurdle to sign it into effect.  Hopefully that happens this week, or in the near future.  We need it, question is, can it help point the economy, more pointedly the housing market, in the right direction?

I’ve been negative on the whole economy for some time now.  The housing market and everything financial tied to mortgages is in bad shape.  You know that, but it looks worse on the inside of the industry.  You have major institutions going out of business.  MAJOR institutions.  Foreclosures are going through the roof and a glut of homes are on the market.  We have around 10 months of inventory on the market right now, plus a decreased demand for those homes.  In addition, a good portion of the demand for those homes can’t get financing. 

The savings rate for Americans has dipped into the negative for the first time since The Great Depression.  We are seeing the worst housing slump in the post World War 2 era.  Median home prices on a national level have not dropped since federal housing agencies began keeping track back in 1950.  I don’t have the figures, someone help me out on this if you know, but I don’t believe they have dropped since The Great Depression.    To top it off, Edgar Cayce’s cycle of recessions and depressions predicts the next great downturn to occur right about now.

With all that said (and I could continue, believe me, I could), I see a glimmer of hope in this stimulus package.  It brings about the best news for the housing market in some time, that’s for sure.  An increase in the conforming loan limits seems like a very minute detail.  It’s not.  Right now, you have a secondary market with very little demand for loans.  Except for portfolio lenders, which are much less common, most of the companies who write your loan turn around and sell it on the secondary market.  With less demand, and a huge supply of people applying for loans, these institutions can be very picky, and take only the best loans.  Not only that, they have to sell them at higher rates for the secondary market to buy them (the higher the rates, the better the return for the investors on the secondary market).

Well, with the increase in the conforming limit, you do a few things here.  First, you take a good portion of the loans off of those markets.  With less loans to have to sell on the open secondary market, the pricing is going to come back into line with the conforming loans.  Not only will the pricing get better, but the liquidity will improve.  You will have the same demand, but less product.  What happens when supply decreases and demand stays the same?  A win for loan applicants is what happens in this situation.

Secondly, this increase is going to allow more people to qualify for good loans.  Loans bought by Fannie Mae and Freddie Mac don’t have to fit in the same tiny box that a jumbo loan may have to.  You can have a bit higher debt ratio, you can even still obtain 100% financing.  What is happening on the open secondary market is that people who shouldn’t be getting loans aren’t.  The flip side is that people who should be getting loans also aren’t.  This is going to open the door for many people who were on the cusp, people who were shopping for a loan, being promised a loan, but in the end being denied.  People who almost qualified.  People who qualified for $417k, but needed $450k or $500k.  This is going to allow people who should be getting loans to get loans.  Also a win for loan applicants both homeowners and home buyers.

In addition, as the financing side of the housing market starts to work again, housing sales will pick up.  People who are in a neg-am loan facing a payment about to reset, maybe double or worse, are going to be able to refinance, so foreclosures will slow down.  It won’t help everyone, but it may help enough people to begin to see a glimmer of a recovery.  In the best case scenario, the secondary market slowly increases demand.  There are still good loans out there.  Lending on real estate is still a good business practice.  It still offers very good returns with good security, if loans are properly underwritten.  It may take a while for the sting to go away from the extreme losses of the past year, but at some point the demand will come back, this increase in conforming limits will help.

In short, this move to expand the conforming loan limit has the potential to help right the ship.  Any real estate agent or finance person should agree that it will definitely help.  It won’t solve all of the problems, and it will not save those in foreclosure, but over the next 12 months, it is sure to have a noticeably positive impact on the housing market.

Hopefully you found this interesting reading, please come back and visit often, let me know if there is a particular topic you would be interested in reading about.