Regulatory Outlook: Loan Limits, Tax Credits

The loan limits that make it possible for high-cost markets like the Bay Area and Los Angeles to have conforming loans up to $729,750 are set to expire December 31, and the $8000 tax credit available to homebuyers expires November 30.

As of this writing on October 5, there’s been no indication as to whether these housing stimulus items will be extended and/or adjusted. Both decisions are up to Congress.

Regarding loan limits, one thing we do know (from this quarter’s story evaluating bottoms for home prices and rates) is that the Fed will no longer be using the extremely expensive ($1.25 trillion) low-rate stimulus of buying mortgage bonds as of March 30. We also know there is a relationship between loan limits and rates.

Normal conforming loan limits are $417k, and loans above that were historically jumbos with higher rates. The limits were increased last year as a way to eliminate that jumbo premium. So if loan limits increases were not extended into 2010, every loan between $417,001 and $729,750 would be a jumbo with higher rates. Couple this with the rate market trading higher as the Fed eases off their rate stimulus, and it could stifle the housing market improvement we’ve seen.

Just as with loan limit increases, the tax credit is an inexpensive way for the government to help consumers engage in the housing market, which is a critical element for overall economic recovery which then helps increase overall tax revenues.

The Fed mortgage bond buying has been highly effective but most agree that their balance sheet should not expand any further. Which makes loan limit and tax credit stimulus for still-tenuous credit and housing markets inexpensive and politically safe options for lawmakers. Announcements on these topics should come soon.