you posted: “I don’t think the difference between the prices today of conforming and nonconforming mortgages is driven by differences in risk. It’s just an indicator of the value of the government guarantee tacked onto the mortgage security when it’s packaged and sold. If you can remove the charge for loan default risk, then of course the price of the loan goes down. This is just as true at $942K as at $417K.”
I would have completely agreed with that assessment 6 months ago and it probably still holds true to some degree today. Here’s the issue, however, as I see it going forward: the rates that the GSAs will be charging for all of these loans will be increasing regardless of how they decide to define a “conforming mortgage.” From a big picture standpoint, what I’m trying to get at is that, ultimately, somebody’s gotta pay when mortgages default, regardless of whether it’s MBS investors or taxpayers via a GSA bailout. Consequently, while it may help a little bit at the margin – because as you correctly point out, the charge for loan defaults is reduced (or perhaps “more dispersed” is a better way of putting it) – it doesn’t really address the REAL problem, which is affordability. If the difference in being able to afford a mortgage is 50 bps (lets just assume that’s the long-term “GSA advantage” for the moment), then one shouldn’t take out the loan. The real problem, at the end of the day, is prices must come down. Raising the conforming limit is a small bandage, in my opinion. But I could be wrong.
