Government’s Stimulus Package Raises GSE, FHA Loan Limits

President Bush signed a package on Wednesday, February 13th, 2008, meant to help stimulate the economy and avoid or reduce a recession. In addition to providing households with tax rebates, this Stimulus Package raises the GSE and FHA conforming loan limits until the end of the year. The GSE and FHA loan limit will rise up to $729,750, but only for certain high-cost areas. These areas will be determined based on a database of housing prices to be provided by The U.S. Department of Housing and Urban Development within 30 days. This new limit is more in-line with median pricing in high-cost areas such as California, and the government hopes that it will encourage people to both buy new homes and refinance their existing ones. According to research from the National Association of Realtors, the new limits will help 138,000 Americans purchase new homes and 200,000 refinance. The government is hoping that the increased activity generated by the package and the fact that lenders can sell more loans to Fannie Mae and Freddie Mac will help stimulate the housing market. However, some analysts aren’t so sure, focusing on the dependence on Fannie Mae and Freddie Mac and the assumption that people will be looking to refinance. Banks are reporting a growing trend for borrowers and investors to walk out on homes when they start reaching negative equity, trading the hit on their credit for defaulting on their loan against the hit on their credit for nonpayment or the cost of keeping a losing investment. In addition to making the package less effective, analysts caution that if this trend keeps growing that Fannie Mae and Freddie Mac may find themselves with more debt than they can handle, with both companies taking on more and more loans to help stabilize the market. Both Fannie Mae and Freddie Mac will report annual loses at the end of February; Fannie Mae for the first time in 22 years, and Freddie Mac for the first time ever.