Will Lower Loan Amounts Hurt Some California Sellers?

July 1 was the cutoff date for loan limits that exceed the permanent loan limits. In case you've forgotten, the upper limit of $729,750 for conventional and FHA in California was a temporary accommodation. The permanent loan limit is $625,500 as of October 1, 2011.

This change is projected to have the biggest impact on the highest-end counties,  i.e., Marin and Contra Costa Counties, but also Riverside and San Diego Counties are not far behind, where 11 and 12 percent of the (non-FHA) home sales would be rendered ineligible. In Los Angeles County, about 2.3%  loans would be rendered ineligible, but Los Angeles County also represents 25% of the state's households.  The lower limits for FHA loan in Los Angeles County would impact about 5.4% of the loans.

All told, the changes could affect 30,000 California families. If liquidity in the high end market becomes slower than it already is, where do the move-up buyers move to if their eligibility is tougher, and where do the condo-to-house buyers move to in the lower range when fewer properties are put on the market?

One loan limit for the entire country cannot be right--the West Coast market rose above the national level years ago, and the current loan limits recognize that. We need to keep the high-end market moving, so the rest of the housing market does also.

Issues raised to Ben Bernanke, Federal Reserve Chairman, in a House Committee hearing July 13:
Ackerman then asked Bernanke how Congress should reconcile the possibility that many homeowners will not buy homes in this higher bracket when they would otherwise be qualified to do so.  "I don't have an answer other than to say that we have to get our housing finance system back into working order," Bernanke said. 
Researchers from George Washington University have said the FHA already exceeds the market share needed to serve its targeted demographic of low- to middle-income homebuyers. And, a separate report from the National Association of Home Builders suggests more than 17 million homes across the country will become ineligible for cheaper federal funding – at a time when the housing market continues to struggle.

The truth is, they're really not sure what works and what is needed, and getting the finance system back in order sounds good.

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