Jergler: Reduction of conforming loan limits may have impact on O.C.

The ball may again be back in the government’s hands. This time it’s not the economy or the debt ceiling. It’s the beleaguered housing market, which the government must decide to carry or to pass on.

Conforming loan limits may be going down at the end of this month unless Congress intervenes, and local, state and national real estate associations are sounding the alarms over the possible negative impact they believe this can cause.

The reduction in this limit could impact 30,000 borrowers in California, and many more nationwide, and the impact on Orange County could be pronounced, according to the associations.

It’s not the first time the conforming loan limit has been threatened with a reduction, and it’s not the first the associations have sounded the alarm bells.

The prevailing argument for lowering the limits is being made by those who consider the conforming loan limit to already be excessively high.

“No one with a mortgage greater than $625,000 needs a subsidy,” writes Daniel Indiviglio in a recent column for the Atlantic. “First, let’s think about who keeping the mortgage limit high helps: relatively affluent individuals.”

Most families use what are called “conforming” loans, or those backed by the Federal Home Administration, to purchase their homes. Congress sets the limits for these loans. The current limits are set to automatically reset to lower limits by Oct. 1.

In high cost areas like Orange County, the cap for these federally backed loans will drop to $625,500 from $729,750.

In short, what this means is that buyers who need a loan that exceeds the new limit will be forced to obtain a “jumbo” mortgage loan, which is often considerably more expensive.

“If you think about it, you’re going to get rid of a pool of buyers,” said Stuart Thomas, owner of RE/MAX Select One, which has offices in Huntington Harbour, Huntington Beach, Dana Point, San Juan Capistrano and soon, Laguna Niguel. “It’s tough enough to buy a home as it is. All of a sudden you start telling somebody you got to come in with 10% or 20% down.”

If this limit is lowered, it means if someone purchasing a home for $700,000, the $25,000 to $30,000 they need to get in the door becomes somewhere in the neighborhood of $70,000, Thomas said.

He noted that the average home price in many areas of Orange County is around $600,000.

Thomas, who has about 100 agents working for him, said he’s hearing from those agents that some buyers are being driven into the market to get ahead of a potential change in the loan limit. However, any boost the market gets from buyers rushing into homes will be outweighed once the loan limit is reduced, he said.

Thomas is also chairman of marketing for the Orange County Assn. of Realtors. OCAR is just one of several real estate associations that is pushing for the limits to stay put, largely through pressure on Congress. The California Assn. of Realtors and the National Assn. of Realtors are leading the efforts by those making the case for the higher loan limits. The groups were instrumental in persuading Congress to raise the limits in 2008 to aid the ailing market.

In fact, both groups are asking Congress to set the limit permanently at its current level: $417,000 for affordable areas to $729,500 for higher cost areas. Bills in both the House of Representatives and the Senate have been introduced to extend the set limits for two years.

Beth Peerce, president of the California Assn. of Realtors, wrote in her monthly column that “more than 30,000 California families will face higher down payments, higher mortgage rates, and stricter loan qualification requirements if the current conforming loan limits are allowed to expire.”

And if they are allowed to expire, Thomas believes the affect will be felt down through the market, with home sales continuing to stay sluggish and home prices continuing to stay stagnant.

“It’s not just people in a high dollar area, it’s people across the board,” he said. “We’re not through this, we got a couple more years of this. This really affects people in Orange County. It’s not good right now. It can only get worse. It’s not the time to take away something that’s allowing people to buy homes.”

Got an interesting real estate story to tell? Email djergler@gmail.com.