In a recent post, I discussed how the FHA and GSE’s loan limits in certain California counties were going to have a dramatic impact on home prices as in expensive areas, where the loan maximums would drop from $729,750 to $625,000.

One of the reasons this was never publicized in the mainstream media because, in all fairness, this was not a national issue.  In fact, only 1.3% of mortgages eligible for government backing in 2010 would have been left out under the new conforming loans limit implemented as of Oct 1^st 2011.  The problem is that of that 1.3%, 60% are in California alone.  So while the Fed was reporting that the conforming loan limits drop would no have a serious effect on the housing market, it seems like they were disregarding the largest and one of the most treacherous real estate markets in the nation.

So now that the new conforming loan limits just began taking hold of the market, what is the outcome?  In Los Angeles and Orange County, the conforming loan limits dropped more than $100,000 from $729,750 to $625,000.  The November sales with loans in between $625,000 and $729,750 declined 84% as compared to last November.

Essentially, the loan limits all but wiped out that area of the market.  Imagine that you were trying to sell in Los Angeles, before the limits changed. You originally valued your property at $700,000, what do you think it is worth now? It is likely that the comps you will use to value your property just lost $100,000 in value because so many of the sales in that price range were made possible through government entities.

So why are these government-sponsored enterprises taking these steps to lower specific loan limits? Maybe because they have realized they weren’t cut out for controlling the housing market  as they originally had thought. One might go so far as to say that because these GSE’s are responsible for 60% of the mortgage market, they might have actually caused the real estate bubble/bust due to the access to credit that they provided by completely disregarding the lending requirements that had kept the national housing market stable for the last century.

It’s time that you say goodbye to the lax qualification requirements and the pathetic FHA 3.5% down payments of 2007.  Be prepared for the future where 20% down payment minimums are the norm.  Raising down payments and lending requirements is the only way to stabilize housing values so that they align themselves with household income, rather than access to government credit.

- Hunter Thompson

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