Menendez and Isakson Call for Extending Higher Home Loan Limits to Boost Weak Housing Market

Menendez and Isakson Call for Extending Higher Home Loan Limits to Boost Weak Housing Market

Higher limits for federally insured loans set to expire at end of September

Washington - U.S. Senators Robert Menendez (D-NJ) and Johnny Isakson (R-GA) today called on Senate Housing appropriations leaders to allow the Federal Housing Administration (FHA), Government Sponsored Enterprises (GSE) and the Veterans Administration (VA) to insure home loans at their current maximum levels for an additional two years, until December 31, 2013.

In 2008, to aid the weak housing market, Congress increased the maximum loan limit for the FHA, GSEs and the VA to 125% of local median home prices. Those limits, if allowed to expire on September 30th for the FHA and GSEs and on December 31st for the VA, could set back the still-weak housing market even further.

In a letter to Senators Murray, Collins, Reid and McConnell, Menendez and Isakson wrote: "The effects of a possible expiration could be dramatic - access to mortgage credit will be significantly impeded for many homeowners and sellers across the country, at a time when the housing market is very weak and credit continues to be tight."

Menendez and Isakson sent the letter a day after a Senate Subcommittee hearing focusing on refinancing and restructuring mortgages. "...we were struck by the virtual unanimity of the housing expert witnesses, both Democratic and Republican, in supporting a temporary extension of the higher loan limits," they wrote. "One witness, Mark Zandi of Moody's and a former adviser to Senator McCain, stated that he opposed extending the higher limit at the beginning of this year, but had changed his mind given that the performance of the housing market has been so weak since then," they added.

In Early August, Menendez and Isakson introduced bipartisan legislation to extend the limits, The Homeownership Affordability Act of 2011, S. 1508. The Homeownership Affordability Act of 2011 is paid for by increasing the guarantee fees charged on the loans themselves, but only those loans priced between $625,500 and $729,500. Guarantee fees, or "g-fees", are charged by loan guarantors such as the GSE's to lenders for bundling, servicing and selling the mortgage-backed securities to investors and are similar to insurance. Additionally, FHA audits for the past decade have shown that larger loans actually perform better and default at significantly lower rates than small loans, so allowing these larger loans to be insured would actually improve taxpayer returns.

FULL TEXT OF LETTER:

September 15, 2011

The Honorable Harry Reid The Honorable Mitch McConnell
Majority Leader Minority Leader
522 Hart Senate Office Building 317 Russell Senate Office Building
Washington, DC 20510 Washington, DC 20510

The Honorable Patty Murray The Honorable Susan Collins
Chair Ranking Member
Transportation, Housing and Urban Transportation, Housing and Urban
Development and Related Agencies Development and Related Agencies
Appropriations Subcommittee Appropriations Subcommittee
Committee on Appropriations Committee on Appropriations
Washington, DC 20510 Washington, DC 20510

Dear Chairman Murray and Ranking Member Collins:

We write to urge you to include an extension of the conforming loan limits that are currently eligible for Federal Housing Administration (FHA), Government Sponsored Enterprise (GSE) and Veterans Administration (VA) insured mortgage loans in any Fiscal Year (FY) 2012 continuing resolution or similar funding measure. The current limits are set to expire beginning on September 30th, 2011 and if they are not extended, the housing market and our broader economy could face painful consequences. We have introduced bipartisan legislation to extend the limits, The Homeownership Affordability Act of 2011, S. 1508.

The current limits have been in place since early 2008 to aid the weak housing market and were passed with broad bipartisan majorities (P.L. 110-185). Because the housing market is even weaker today and continues to decline, it would be a terrible decision to remove support of the housing market at this time. If the limits are not extended, the average decline in loan limits would be more than $68,000 per county, and loan limits for FHA, the GSEs and the VA will all drop to 115% of local area median home prices with a cap of $625,500. The current loan limits for the FHA and GSEs are for 125% of local area median home prices with a cap of $729,750.

The effects of a possible expiration could be dramatic - access to mortgage credit will be significantly impeded for many homeowners and sellers across the country, at a time when the housing market is very weak and credit continues to be tight. In the past year, new home prices fell another 7.5% according to CoreLogic.[1] Furthermore, the FHA and GSEs are currently insuring the vast majority of new mortgage originations because private lending remains severely constricted. We cannot, at this time, rely on private lending to pick up the slack if the current governmental limits were to expire. The current state of the housing market needs further short-term stabilization as private capital finds its way back into the market.

The Homeownership Affordability Act is fully paid for by increasing the guarantee fees charged on the higher-limit loans themselves. Guarantee fees, or "g-fees", are charged by loan guarantors, such as the GSEs, to lenders for bundling, servicing and selling the mortgage-backed securities to investors and are similar to insurance. The Congressional Budget Office estimates that the GSE loan limit extension has a $285 million mandatory cost and the VA loan limit extension has a $51 million mandatory cost, but the FHA loan limit extension has $194 million in discretionary savings. The mandatory costs of the GSE and VA loan limit extensions ($336 million) are offset by an increase of $336 million in guarantee fees but only for those loans priced between $625,500 and $729,500. S. 1508 also has $194 million in discretionary savings from the FHA loan limit extension. Additionally, FHA audits from the past decade have stated that larger loans actually perform better and default at significantly lower rates than smaller loans, so allowing the larger loans could actually improve returns to taxpayers.

At yesterday's Senate Subcommittee hearing on refinancing and restructuring mortgages, we were struck by the virtual unanimity of the housing expert witnesses, both Democratic and Republican, in supporting a temporary extension of the higher loan limits. Only one of the nine witnesses expressed opposition to keeping the higher loan limits given how weak the housing market is. One witness, Mark Zandi of Moody's and a former adviser to Senator McCain, stated that he opposed extending the higher limit at the beginning of this year, but had changed his mind given that the performance of the housing market has been so weak since then.

Reducing the limits prematurely will negatively affect an already weak housing market. It is crucial that Congress provides short-term support for homeowners, homebuyers and the economy by extending the conforming loan limits in any FY12 continuing resolution or similar funding measure.

Sincerely,

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