The Conforming Loan Limit

^Pr^ep^ar^{ed f}^o^r^M^e^m^b^ers^an^d^Com^mⁱ^t^t^ees^of^C^ong^r^e^ss

Two government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, buy residential
mortgages from the original lenders and resell them as mortgage-backed securities to investors
(or hold them in their own portfolios). The law includes a conforming loan limit, a ceiling on the
size of loans the GSEs can buy. Since 2006, the standard limit has been $417,000, and on
November 7, 2008, the Federal Housing Finance Agency (FHFA) announced that the national
conforming loan limit in 2009 would continue to be $417,000. In 2008, the Economic Stimulus
Act of 2008 (P.L. 110-185) and the Housing and Economic Recovery Act of 2008 enacted higher
limits in “high cost” areas. Securitization of mortgages that exceed the limit—called jumbo
loans—is done by private financial institutions. GSE status allows Fannie and Freddie to issue
debt at lower cost than other private firms; part of this subsidy is passed on to home buyers in the
form of lower interest rates. Interest rates on jumbo mortgages are slightly higher than those on
the conforming loans that the GSEs can purchase. The spread between jumbo and conforming
loan rates has been higher than normal since mid-2007.
The Economic Stimulus Act of 2008 enacted a temporary increase in the conforming loan limit.
For mortgages originated between July 1, 2007, and December 31, 2008, the limit was capped at
175% of the statutory limit, or $729,750, in certain high-cost areas. The GSEs are able to
purchase these conforming loans after December 31, 2008. The Housing and Economic Recovery
Act of 2008 raised the limit permanently by up to 50% (that is, to $625,500) in high-cost housing
areas, allowing the GSEs to expand into markets previously served by non-GSE institutions. If
the GSEs supplant the existing securitizers of jumbo mortgage loans, there is likely to be some
reduction of mortgage rates in high-cost areas, which will enable more prospective buyers to
qualify for (or refinance) loans. Some would argue, however, that because the size of GSE
operations already poses a potential risk to financial stability, it would be imprudent to permit a
significant expansion of their activities. This report analyzes the implications of raising the
conforming loan limit in high-cost areas. It will be updated as legislative developments warrant.

Backgr ound ..................................................................................................................................... 1
Proposals to Raise the Loan Limits.................................................................................................1
The Impact of Raising the Conforming Loan Limit........................................................................2
Policy Issues....................................................................................................................................4
Table 1. Selected Areas Where Conforming Loan Limit Would Rise.............................................2
Author Contact Information............................................................................................................5

Congress enacted the modern conforming loan limit in the Housing and Community
Development Act of 1980 (P.L. 96-399). The initial limit was $93,750 for a single-family home
(39% above the FHA ceiling at the time), and the law provided for annual increases in the loan
limit to adjust for rising prices, as reflected in a housing price index published by the Federal ²
Housing Finance Board (FHFB). The loan limit was initially set at a level significantly higher
than the national average home price, and with indexation it has remained higher. In 2007, the
conforming loan limit stood at 145% of the average new home price, and 162% of the average
resale price of an existing home. Since 2006, the basic conforming loan limit has held steady at ³
$417,000.

The Economic Stimulus Act of 2008 (P.L. 110-185) enacted a temporary increase in the
conforming loan limit. For mortgages originated between July 1, 2007, and December 31, 2008,
the loan limit for an area was the greater of (1) the existing limit of $417,000 or (2) 125% of the
area median home price, not to exceed a ceiling of 175% of the statutory limit, or $729,750. The
list of affected areas is available at http://www.ofheo.gov/media/hpi/AREA_LIST.pdf. A total of

71 metropolitan and micropolitan statistical areas had higher 2008 conforming loan limits,

including 224 counties and cities not in counties. There are 21 counties outside of metropolitan or
micropolitan areas with increases.
The Housing and Economic Recovery Act of 2008 (H.R. 3221, P.L. 110-289) permanently
removes the single conforming loan limit for the contiguous 48 states. The loan limit will be
allowed to rise in metropolitan statistical areas—defined as “high-cost”—where the median home
sale price exceeds the current conforming loan limit. The conforming loan limit for that area will
be 115% of the median home price in the area, except that increases would be capped at 150% of
the statutory loan limit (the limit that now applies to Alaska, Hawaii, and the two island
territories). This system for determining the limit took effect when the temporary limits set by the
stimulus act expired on December 31, 2008. The GSEs are able to purchase high-cost conforming
loans after December 31, 2008, subject to the requirement in their charters that loans purchased
be no more than one year old.
A look at median prices in various metropolitan areas of the country shows that the conforming
limit is rising in several localities under P.L. 110-185, and (in fewer areas) has risen under P.L.
110-289. The available data are for existing single-family home prices, collected by the National

¹^Barb^ara^Mile^{s, f}^o^rm^e^r^Spe^cⁱ^a^{list in Fi}^na^nc^ia^{l I}ⁿ^stitu^tio^{ns, c}^o^ntri^but^e^d^to^{this re}^p^o^rt.
²^Hig^h^e^r^lim^its^w^e^re^se^t^f^o^{r hom}^e^m^o^rtg^a^g^e^{s c}^ove^ring^{2-, 3-}^a^nd^4-uⁿ^it^dw^e^lling^s^{. Se}^e^{12 U.S}^.^C.¹⁴⁵⁴^f^o^{r Fre}^ddie^Ma^c
^a^{nd 1}²^U^.^S.C^.¹⁷¹⁷^f^o^r^Fa^nnie^M^a^e^.
³^P^.^L^.^96-³⁹^{9 se}^{t a}^hig^h^e^r^lim^{it f}^o^{r m}^o^rtg^a^g^e^{s on re}^side^nc^e^s^{in A}^l^a^s^k^a^{, Ha}^w^a^{ii, a}^{nd G}^u^a^m^{, a}^{ll tho}^u^g^h^t^a^t^the^tim^e^to
^h^a^{ve h}ⁱ^gh^{er t}^h^anⁿ^o^r^m^a^l^co^st^{s o}^f^b^uⁱ^l^dⁱⁿ^{g and}^l^o^w^e^{r t}^h^an^no^rm^al^a^{ccess t}^o^credⁱ^t^b^ecau^{se o}^f^t^h^ei^{r re}^m^o^t^eⁿ^e^ss.^In^t^h^o^s^e
^a^r^e^a^s^{, the}^c^onf^or^mⁱ^ng^loaⁿ^lim^{it w}^a^s^s^e^{t a}^t^150%^of^the^lⁱ^m^{it tha}^t^a^pplie^{d to}^the^r^e^s^t^of^the^na^ti^on.^Iⁿ¹⁹⁹^2,^the^Vir^gⁱⁿ
^I^s^la^nds^w^a^s^a^dde^{d to}^the^lis^t^of^a^r^e^a^s^w^h^e^r^e^the¹⁵^0%^lim^{it a}^pplie^d⁽^b^y^Se^c^.¹³⁸²⁽^k⁾^of^P.L^.¹⁰^2-⁵⁵⁰⁾^.

Association of Realtors, covering 156 metropolitan areas. Based on data for the third quarter of

2007, the impact on several areas is shown in Table 1 below.

Table 1. Selected Areas Where Conforming Loan Limit Would Rise
^{New Loan Limit}
^High-^{Cost Housing A}^rea
^{P.L. 1}^10-1⁸⁵ ^{P.L. 1}^10-2⁸⁹
^{Barnstable Town, MA}^$46^2,50⁰^$41^7,00⁰
^{Boston/Quincy/Cambridge, MA}^$52^3,75⁰^$46^5,75⁰
^{Boulder, CO}^$46^0,00⁰^$41^7,00⁰
^{Bridgeport/Stamford/Norwalk, C}^T^$70^8,75⁰^$51^1,75⁰
^{Los Angeles/Long Beach/Santa}^A^{na, CA}^$72^9,75⁰^$62^5,50⁰
^{Miami/Ft. Lauderdale, FL}^$42^3,75⁰^$41^7,00⁰
^{New York City/N. NJ/Long}^Islan^{d, NY/NJ}^$72^9,75⁰^$62^5,50⁰
^{Newark/Union, NJ}^$72^9,75⁰^$62^5,50⁰
^{Riverside/San Bernardino, CA}^$50^0,00⁰^$41^7,00⁰
^{Sacramento/Arden/Arcade/Rosedale, CA}^$58^0,00⁰^$47^4,95⁰
^{San Diego/Carlsbad/San Marcos, CA}^$69^7,50⁰^$54^6,25⁰
^{San Francisco/Oakland, CA}^$72^9,75⁰^$62^5,50⁰
^{San Jose/Sunn}^{yvale/Santa Clara, CA}^$72^9,75⁰^$62^5,50⁰
^{Seattle/Tacoma/Be}^{llevue, WA}^$56^7,50⁰^$50^6,00⁰
^{Washington, DC/MD/VA}^$72^9,75⁰^$62^5,50⁰
^Source:^{Loan limits (P.L. 110-1}⁸^{5) are from}^{Office of Federal Ho}^{using E}^nter^{prise Ove}^rsight,^Metro^politan
^{Statistical Areas, Micropolitan Statis}^{tical Areas and Rural}^{Counties wher}^{e Loan Limits are Set Based on High-Cost Area}
^{Provisions of}^HERA^{, available at http://www.ofheo.gov/}^media/^hpi/^{AREA_LIST.pdf.}

The existence of high-cost housing areas implies that the benefits of the GSE subsidy are not
distributed uniformly. GSE status allows Fannie and Freddie to borrow at lower interest rates than ⁴
non-GSE financial institutions. A portion of this subsidy is passed on to home buyers whose
mortgage loans are purchased and securitized by the GSEs. In 2003, Fannie and Freddie
purchased 35.1% of all mortgages (by dollar value) originated nationwide. This percentage varied
from state to state. In three states and the District of Columbia, the GSEs purchased less than 30%
of new mortgages, and all three (and the District) appear in Table 1—California, New York, and
Connecticut. In 15 states, on the other hand, the two GSEs purchased over 40% of new ⁵
mortgages.

⁴^T^h^e^c^h^ie^f^fⁱ^na^nc^ia^{l a}^d^v^a^nta^g^e^c^onv^ey^e^d^{to Fa}ⁿⁿ^ie^aⁿ^d^Fr^e^d^die^by^G^S^{E s}^t^a^t^us^is^the^“ⁱ^m^p^lic^{it g}^u^a^r^aⁿ^te^e^.^”^A^lthoug^h
^G^S^{E de}^{bt is n}^o^{t e}^x^plic^it^ly^ba^c^k^e^d^by^the^f^u^{ll f}^a^{ith a}^{nd c}^r^e^d^it^of^the^T^r^e^a^sur^y^{, m}^a^rk^e^t^pa^rtic^ipaⁿ^{ts be}^li^e^v^e^tha^t^the
^g^o^v^e^rn^m^e^{nt w}^{ill not a}^llow^e^ithe^r^G^S^{E to be}^c^o^m^e^insolv^eⁿ^t.
⁵^The²⁰⁰⁶^M^o^r^t^ga^ge^M^a^r^k^e^t^Sta^tⁱ^s^tic^{al An}^nu^al^,^v^o^{l. 1, p. 25.}

In high-cost areas, in other words, the GSEs’ mortgage purchase and securitization operations are
constrained by the conforming loan limit. Loans that exceed the conforming loan limits can only
be securitized by non-GSE issuers, and there is a large secondary market for jumbo mortgage
loans. In 2006, total prime jumbo loan originations were estimated at $480 billion, while $219
billion in prime jumbo mortgage-backed securities (MBS) were issued, implying a securitization ⁶
rate for jumbo mortgages of 45.6%. By contrast, Fannie and Freddie securitized 83% of loans
originated in 2006 in the conventional, conforming mortgage markets where they are allowed to ⁷
operate.
Unlike the secondary market for conforming loans, where the two GSEs are dominant, dozens of
private issuers are active in the “non-agency” market. The top ten issuers accounted for only ⁸

59.0% of the market in 2007.

Conforming mortgage loans tend to carry lower interest rates than nonconforming loans. A
number of studies have attempted to measure the spread between conforming mortgage and
jumbo loan rates and the extent to which the rate differential can be attributed to the subsidy ⁹
contained in GSE status. Most estimates of the spread between conforming and jumbo loans fall ^th
into the range of 18-60 basis points. (A basis point is 1/100 of a percent.) All researchers assume
that at least part of this spread is due to the GSE subsidy, but other factors are involved. For
example, as properties become more expensive, lenders worry more about price volatility. That is,
as the risk of a significant drop in the market value of the house—the loan’s collateral—increases,
lenders raise rates to compensate for that risk. Second, the existing jumbo secondary market
cannot realize certain economies of scale because market participants are largely frozen out of the
conforming loan market (due to their inability to compete with the GSEs). These and other factors
suggest that allowing the GSEs into the jumbo market would not cause the entire spread to
disappear. There is no consensus as to how much of the 18-60 basis point spread is due to the ¹⁰
GSE subsidy—estimates range as low as four basis points.
Thus, it is uncertain how significant the benefits would be if the conforming loan limit were
increased during normal times. As a rough guide to the size of potential savings, assume that the
interest rate on a 30-year, 6.25% mortgage of $625,500 is reduced to 6%. The home buyer’s
monthly mortgage payment of $3,851 (at 6.25%) would be reduced by about $100. Over the 10-
year average life of a loan, this reduction yields interest savings of about $15,500. Of course, this
figure shrinks if some portion of the rate spread persists, if, that is, not all the savings are passed
through to borrowers. If the interest rate paid by the hypothetical home buyer in the example

⁶^The²⁰⁰⁸^M^o^r^t^ga^ge^M^a^r^k^e^t^Sta^tⁱ^s^tic^{al An}^nu^al^,^v^o^{l. 2, p. 3.}
⁷^Ibid^.
⁸^I^b^id^{., v}^o^l^.²^,^p^.¹⁶^{. (}^T^he^t^{op f}ⁱ^v^e^non^-^G^{SE MB}^{S is}^s^u^e^r^sⁱⁿ²⁰⁰⁷^w^e^r^e^C^ountr^y^wⁱ^de^Fina^nc^ia^{l, L}^e^hm^aⁿ^B^r^ot^he^r^s^{, W}^e^lls
^Fa^r^g^{o, W}^a^s^h^ing^t^on^Mut^u^a^l^{, a}ⁿ^d^B^e^a^r^Ste^a^r^ns^{. A}^t^the^e^nd^of²⁰⁰^8,^only^W^e^lls^Fa^r^g^o^w^a^s^aⁿ^inde^peⁿ^d^eⁿ^{t c}^o^m^p^aⁿ^y^.⁾
⁹^Se^e^U^.^{S. C}^ong^r^e^s^sⁱ^ona^{l B}^udg^e^t^O^f^fⁱ^ce^,^U^pdate^d^Es^tim^ate^s^of^the^Subsⁱ^d^ie^s^t^o^the^H^ousⁱ^{ng G}^S^Es^,^A^p^r^.^{8, 20}^04;
^W^a^yⁿ^e^P^a^ss^m^o^re^{, Sha}ⁿ^e^S^h^e^r^lun^d^{, a}ⁿ^{d G}^illia^{n Burg}^e^{ss, “}^T^he^Eff^e^c^t^of^G^ove^rnm^e^{nt Spo}ⁿ^sore^{d En}^te^rprise^{s on}
^M^o^r^t^{gage R}^a^t^e^s,^”^Re^{al Es}^tate^Ec^onom^ic^s^,^v^o^l.^33,^f^a^{ll 200}^{5; J}^o^s^e^p^h^A^.^Mc^K^e^nz^ie^{, “}^A^R^e^c^ons^ide^r^a^tⁱ^on^of^the
^J^u^m^bo/N^on-^J^u^m^{bo M}^o^r^t^g^a^g^e^R^a^te^Dⁱ^f^f^e^r^eⁿ^tia^l,”^J^ourⁿ^a^l^{of Re}^{al E}^s^tate^Fin^anc^e^an^{d Ec}^o^nom^ic^s^{, v}^o^l^.²⁵^{, Se}^p^.^-D^e^c^.
²⁰⁰^2,^p.¹⁹^{7; a}^{nd Bre}ⁿ^{t Am}^brose^,^Mic^h^a^e^l^L^a^Cour-L^ittle^,^aⁿ^d^Aⁿ^th^ony^Sa^nde^{rs, “}^T^he^Ef^f^e^c^t^of^Conformⁱ^ng^L^o^aⁿ
^S^t^at^u^s^on^Mo^rt^{gage Yi}^el^d^S^p^reads:^A^L^o^an^L^e^vel^Aⁿ^al^ysi^s^,^”^Re^{al Estate}^Ec^o^nomic^s^{, v}^o^l^.³²^{, w}ⁱ^nte^r²⁰^04,^p.⁵^41.
¹⁰^S^{ee P}^a^ssm^o^r^e,^S^h^erl^uⁿ^d^,^and^Bu^r^g^ess,^o^p^.^ci^t^.^,^an^{d L}^e^hⁿ^e^rt^,^P^a^ssmo^r^e,^an^{d S}^h^erl^u^nd^,^G^S^Es^{, M}^o^r^t^ga^ge^Rate^s^,^an^d
^Se^c^ond^ary^M^a^rk^e^t^Ac^tiv^itie^s^{, Fi}^na^nc^e^a^{nd Ec}^onom^ic^s^Dⁱ^s^c^us^sⁱ^{on S}^e^rⁱ^e^s^{, Fe}^de^r^a^{l R}^e^s^e^r^v^e^,^2006-^30.^T^h^e^la^tte^r^pa^pe^r
^f^ound^no^sⁱ^gⁿ^if^ic^aⁿ^{t e}^f^f^e^c^t^{on m}^o^r^t^g^a^g^e^r^a^t^e^s^p^r^e^a^d^s^.

above falls by only seven basis points, the monthly payments are lower by about $28 a month, ¹¹
and interest savings would be about $4,400 over 10 years.
With the housing market downturn that began in 2006, there is a new rationale for raising the
conforming loan limit: to stimulate the jumbo mortgage market, which would in turn provide
stimulus for the housing sector and the economy. Credit conditions in the jumbo market are said
to be unusually tight—the spread between jumbo and conforming loan rates has widened,
exceeding 150 basis points at the end of 2008. High rates price many would-be buyers out of the
market: in an environment of falling prices, lenders are less willing to make loans, especially the
kinds of interest-only and negative amortization mortgages that sustained the boom.
Pressure on lenders is intensified by weakened demand for mortgage-backed securities (MBS) in
the secondary market. Investors have seen many subprime MBS lose much of their value, and are
reluctant to purchase bonds, with the exception of those issued by Fannie or Freddie, who ¹²
guarantee timely payment of interest and principal, and are backed by the “implicit guarantee”
of their GSE status, which was underlined by the provisions in P.L. 110-289 that authorized the
Treasury to purchase any amount of GSE debt or equity securities. It is hoped that allowing the
GSEs to securitize some jumbo loans will restore liquidity to the secondary market, enable
lenders to transfer the risk of holding jumbo mortgages, and make loans more affordable and
available. The GSEs’ conservatorship would appear to provide Treasury backing for GSE debt,
but not for stockholders. For more information on the GSEs’ conservatorship, see CRS Report
RS22950, Fannie Mae and Freddie Mac in Conservatorship, by Mark Jickling.

The case for raising the conforming loan limit is based partly on equity concerns. Home buyers in
the conforming mortgage market may receive part of the GSE subsidy in the form of lower
interest rates. Since housing prices vary across the nation, the geographical distribution of this
benefit is uneven. Before the recent increases, the loan limit was $417,000; in many parts of the
country, this amount covers all but the top end of the housing market. In high-cost areas like San
Francisco or New York City, on the other hand, a large proportion of real estate transactions take
place well over that limit. Since current law sets a higher limit for Alaska, Hawaii, Guam, and the
Virgin Islands, where housing costs are assumed to be high, why not raise the limit in other high-
price areas?
A counter-argument is that the additional subsidy created by raising the loan limit would go
overwhelmingly to mortgage holders with high incomes. If the purpose of the GSEs is to foster

¹¹^N^o^te^a^l^s^o^t^h^a^t^u^nde^r^P.L^.¹^10-¹⁸^{5 n}^o^{t a}^{ll m}^o^r^t^g^a^g^e^s^{in hig}^h^-^c^os^{t a}^r^e^a^s^w^ould^be^c^o^m^e^c^onf^or^mⁱ^ng^loaⁿ^s^.^L^o^aⁿ^s^f^o^r
^am^ounts^g^r^e^a^t^e^r^thaⁿ¹⁵^0%^or¹⁷^5%^of^the^s^t^a^t^ut^ory^li^m^{it w}^{ould s}^t^{ill be}^tre^a^t^e^d^a^s^no^nc^onf^ormⁱ^ng^{. In ot}^he^{r w}^o^rds^,^t^h^e
^{top e}^nd^of^the^h^ousiⁿ^g^m^a^r^k^e^t^w^ould^be^uⁿ^a^f^fe^c^t^e^d^by^the^{bills’ pr}^o^vⁱ^{sions. A}^l^{so, d}^u^ring^t^h^e^m^o^rtg^a^ge^m^a^rk^e^t^tur^m^oil
^o^f²⁰⁰⁸^,^t^h^{e di}^f^f^eren^{ce i}ⁿⁱⁿ^t^e^rest^rat^e^{s f}^o^{r co}ⁿ^f^o^r^mⁱⁿ^g^l^o^an^{s an}^{d j}^u^m^b^o^l^o^an^{s t}^h^at^w^e^{re n}^o^t^G^S^E^-^p^u^r^ch^asab^l^e
^f^r^eq^u^eⁿ^t^l^y^w^a^s^m^o^{re t}^h^an^on^{e p}^e^r^cen^t^a^{ge p}^oⁱⁿ^t^.^T^h^{ere was so}^m^e^evⁱ^d^en^{ce t}^h^at^t^h^{ere w}^a^{s n}^o^dⁱ^f^f^e^ren^c^{e i}ⁿ^rat^e^{s on}
^jum^bos^tha^t^t^h^e^G^S^Es^c^ould^p^u^r^c^ha^s^e⁽^e^.g^{., $5}^00,⁰⁰^{0 i}ⁿ^t^h^e^W^a^s^h^ing^t^on,^D^.^C^{., a}^r^e^a⁾^aⁿ^{d jum}^bos^t^h^a^t^the^G^S^Es^c^oul^d
^not^pur^c^h^a^s^e⁽^e^.g^{., $8}⁰⁰^,0⁰⁰⁾^.
¹²^G^S^{E de}^{bt is}^not^e^x^plic^itly^ba^c^k^e^d^by^the^f^u^{ll f}^a^{ith a}^{nd c}^r^e^d^{it of}^th^e^g^o^v^e^rn^m^e^{nt, but}^b^oⁿ^d^b^u^y^e^{rs do n}^o^t^be^lie^v^e^tha^t
^the^T^r^e^a^s^ur^y^w^{ill a}^llow^e^ithe^r^G^S^{E to}^de^f^a^{ult. T}^h^{is is c}^a^lle^{d t}^h^e^“ⁱ^m^p^lic^{it g}^u^a^r^aⁿ^te^e^.^”^A^s^a^re^{sult, in}^v^e^{stors v}ⁱ^e^w^G^S^E-
^issue^d^MBS^a^s^le^{ss risky}^thaⁿ^de^b^t^issue^d^by^othe^{r f}ⁱ^r^m^{s, e}^v^eⁿ^w^h^eⁿ^the^c^r^e^dⁱ^t^q^u^a^lity^of^the^un^de^rlyⁱ^ng^m^o^rtg^a^g^e^{s is}
^{no be}^tte^r^.

home ownership, the impact of raising the limit is likely to be minor: those who would benefit
from the change already have high homeownership rates.
Another key issue is risk. As noted above, the jumbo home market is in trouble because
perceptions of risk are sharply higher than they were during the boom. Lenders are more cautious
because the value of their collateral—the house—may drop significantly. MBS investors have the
same fear, making it harder for lenders to transfer price and credit risk to the secondary market.
GSE entry into the jumbo market would appear to meet the needs of both lenders and investors:
the GSE (and the implicit Treasury) guarantee would reassure MBS buyers, leading to a
resumption of securitization, in turn encouraging lenders to make loans at more affordable rates.
But GSE participation would not reduce overall risk in the market. If house prices continue to
fall, and delinquencies and foreclosures continue to rise, the kinds of multi-billion dollar losses
that have been reported in recent months could fall upon the GSEs. Could they withstand those
losses, or would the Treasury be forced to engineer a bailout to prevent a default that could be
highly destabilizing to the global financial system? What is the potential cost of such an
intervention to the taxpayers?
These questions cannot be answered with certainty, but it is worth noting that the systemic risk
posed by the rapid growth of the GSEs in recent years has been a major issue in the debate over
GSE reform. Former Federal Reserve Chairman Alan Greenspan and others have called for a
reduction in size of the GSEs’ investment portfolios (currently about $1.4 trillion) on the grounds
that they represent an unacceptable concentration of financial risk in two companies whose
financial controls have been shown to be weak. As director of OFHEO, FHFA director James
Lockhart has argued against raising the conforming loan limit unless the GSE regulator also ¹³
receives enhanced safety and soundness powers.
If the current tightness in the jumbo loan market reflects an over-reaction on the part of market
participants in the grip of panic, some argue that an increase in the conforming loan limit may be
a useful corrective and avert unnecessary damage to housing markets and the economy. On the
other hand, if market fundamentals dictate that home prices still have a long way to fall, the
assumption of more risk by the GSEs (and, more or less implicitly, by the Treasury) could
arguably slow the market adjustment process and foster an unwelcome expectation in financial
markets that they will always be rescued from the consequences of their own mistakes.
^{N. Er}^{ic W}^e^iss ^M^a^r^k^Jⁱ^c^k^lⁱ^ng
^Sp^{ecialist i}ⁿ^Fiⁿ^aⁿ^c^{ial Eco}ⁿ^o^m^ics^Sp^{ecialist i}ⁿ^Fiⁿ^aⁿ^c^{ial Eco}ⁿ^o^m^ics
^e^w^ei^s^s^@^c^rs^.l^oc.g^o^v^{, 7-}⁶²⁰⁹^m^jⁱ^c^k^lⁱⁿ^g@^crs^.^l^o^c.^g^o^v^,^7-⁷⁷⁸⁴

¹³^“^S^ta^te^m^e^{nt on C}^onf^or^mⁱ^ng^L^o^aⁿ^Lⁱ^m^{it I}ⁿ^c^r^e^a^s^e^,^”^Ja^{n. 28}^{, 2}⁰⁰⁸^{, a}^t^http:^//w^w^w^.of^h^e^o^.g^ov^.