If you have been paying attention to the recent news surrounding the economic stimulus package, you know that conforming loan limits are set to rise.  Old limits of $417,000 are being changed on a county by county basis, based on the median home prices for that particular county.  That is good news for the housing market, but more changes are on the horizon.

Simply raising the conforming limit, which is the maximum loan amount Fannie Mae and Freddie Mac can purchase, is a good step in the right direction, but more change is needed to get us out of the current housing rut we are in.  An additional issue, and a major one, is the liquidity of the credit markets, especially in the mortgage lending world.  A proposed change on the horizon could help out with those liquidity issues as well.

Currently, Fannie Mae and Freddie Mac are capped at a total of $1.5 trillion on their combined holdings.  They are also required to keep 30% more capital in reserve than the minimum legal requirement.  This is to safe guard against losses such as those recently suffered in the mortgage meltdown.  Fannie Mae lost $3.56 billion last quarter, that is compared to a $604 million profit last year in the same quarter. 

March 1, the $1.5 trillion cap will be removed, which will help the mortgage market’s liquidity.  The reserve requirement could be the next thing to be relaxed.  The government is now considering decreasing this reserve requirement gradually.  Because of this restriction, both companies have been forced to sell special stock to raise $13 billion in capital in 2007, in addition to reducing their dividends.  By decreasing the reserve requirement, the government would essentially be freeing up capital that would be pumped into the mortgage lending world.

This is essential.  With a more liquid market, the extremely tight lending standards of today could begin to relax.  To get out of the current real estate slump, this is key.  It won’t solve the problems by itself, we still have a huge amount of inventory on the market, and foreclosures are still at record highs.  Until we begin to make our way through the current inventory on the market, I don’t see a big turn in the market.  A big piece of this puzzle is finding a solution to these foreclosures. 

As banks take back more and more properties, they are slashing their asking prices to get them off their books.  So not only do we have a glut of homes on the market, but we have a large percentage of them as bank owned.  Banks don’t want to own property, and are willing to take the large losses that come with the reduced price they must market them at to sell in a timely manner.  In the local East Contra Costa real estate market, over 50% of homes currently on the market are foreclosure or bank owned properties. 

A more liquid mortgage market will help by allowing more people to buy these homes, as well as allow more people to refinance out of their adjustable rate loans, keeping them out of foreclosure.  With the recent changes, it is anticipated that refinancing activity will increase as borrowers with adjustable rates resetting higher will secure more affordable fixed rate mortgages.  These upcoming changes are not a cure all, but they are surely a step in the right direction.

If you have questions regarding the new limits, guidelines or rates, or if you are in the market for a California home loan, please feel free to contact me for more information.