Proposed Changes to the Conforming Loan Limit

Publication Date: June 2005

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

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Abstract:

Two government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, buy residential mortgages from the original lenders, package them, and sell the resultant mortgage-backed securities to investors (or hold them in their own portfolios). Current law includes a conforming loan limit that puts a ceiling on the size of the mortgages that the GSEs can buy. Securitization of mortgages that exceed the limit --called jumbo loans -- is performed 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, although the differential is not constant over time, and reflects other factors besides the GSE subsidy.

Section 123 of H.R. 1461, the GSE regulatory reform bill, proposes to raise the conforming loan limit by up to 50% in areas with high housing prices, which would allow Fannie and Freddie to expand their operations into markets now served by private (non-GSE) institutions. If the GSEs supplant the existing securitizers of jumbo mortgage loans, some home buyers in expensive areas may experience a small reduction in their mortgage rates. Some would argue, however, that (1) the secondary market for jumbo mortgages works well without GSE participation, and that (2) 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 proposal to raise the conforming loan limit. It will be updated as legislative developments warrant.