Jumbo loans would present new risks to the already challenged GSEs. The prepayment and credit risks are different than those of conforming loans. The provision also pushes the GSEs to increase their geographic concentration in some of the riskiest real estate markets. Roughly half of all jumbos are in California. Underwriting them successfully will require new models and systems to ensure safe and sound implementation. Capital also would present challenges even if all newly conforming mortgages are securitized. A $600,000 loan requires as much capital as three $200,000 loans. . .
With the stimulus bill stalled and high profile opposition like the above, a conforming limit increase has not been as easy as many had expected, though we’d be floored if it didn’t pass in some form soon. Lots if political will behind it, whether or not it is a) a good idea, and b) going to help the housing market woes.
Other notable data points from Mr. Lockhart’s testimony worth quoting:
The GSEs have become the dominant funding mechanism for the entire mortgage system in these troubling times…concentrating mortgage risks on themselves…"
Public disclosures indicate that Freddie Mac will report annual losses for the first time in its history and Fannie Mae for the first time in 22 years.
Enterprise [Fannie/Freddie] credit losses…are approaching double normal levels and climbing.
the combined [share of new originations] of the housing GSEs may be 90 percent. . . .
They also have very large counterparty risks including seller/servicers, mortgage insurers, bond insurers and derivative issuers.
Suffice to say that if Lockhart has his way, we wouldn’t see any increase in conforming limits without GSE reforms, and given the above, we are likely to see still more credit tightening from the Agencies.