My current position is that raising conforming limits for Fannie and Freddie is ultimately a good thing.
Here’s what will happen. Bond traders have no interest in holding MBS that mix high-risk jumbo loans with regular conforming loans. Freddie Mac CEO has already stated explicitly that they are going to isolate new loans in a separate pool. Fannie will have to do the same.
In 2005-2007, despite generous housing-to-income requirements of private lenders, most jumbos were stated income. How many people can really qualify for a new conforming jumbo? (Best case scenario, you’ll need 180K documented income to get a median house in 4S Ranch) My guess is, a minority. That minority will benefit from lower rates on jumbos. (Still, jumbo rates won’t come down all the way to conforming, some rate differential will remain) As an unintended consequence, private-label jumbos will suddenly become the 2008 version of subprime/Alt-A – all safe customers are gone to GSEs, the remaining ones are no good, either interest rates go up or the entire market disappears.
Net effect – fewer jumbos given to fewer customers, fewer houses sold in high-end areas.
