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Washington should raise home-loan cap

If policymakers truly want to help reignite the real estate market and help homebuyers, they should do one thing – and soon: raise the limit on so-called conforming loans to $650,000.

Conforming loans are those backed by Freddie Mac and Fannie Mae. And because they are guaranteed by these federally backed agencies, lending has kept flowing even as other private credit markets have seized up.

The current conforming loan limit is just $417,000, which means the majority of home purchases in expensive states like California can’t qualify.

Under normal circumstances, this just means private lenders pick up where Freddie Mac and Fannie Mae leave off. But as lenders have pulled back from making all kinds of loans, the heart of the North Bay home market has been hit hard.

An analysis of home resales in Sonoma County in November shows just how hard. Amazingly, home resales below or near the current conforming loan limit of $417,000 actually rose markedly in November compared with 2006 – 136 sales vs. 106.

But for that median-priced home of $500,000 on up to $700,000, there were just 64 sales compared with 155 a year ago. The lack of credit is one of the main reasons for this, industry experts said.

Treasury Secretary Henry Paulson, the architect of programs to ease the impact of adjustable-rate mortgages on homeowners, has voiced support for a temporary increase in the conforming loan limit. But he said an adjustment – which has not been made for three years – must be in connection with broad reforms of the oversight of Freddie Mac and Fannie Mae.

Surely it is responsible to move with caution before extending what amounts to a taxpayer loan guaranty. But reforms could take months in what is turning out to be a credit emergency in high-cost housing markets like the North Bay.

Action is needed now.

A temporary increase in the conforming loan limit to $650,000 even has a precedent. Conforming loan limits are already 50 percent higher in Alaska, Hawaii, Guam and the Virgin Islands because they have been designated high-cost areas.

Extending those higher limits immediately to California – even temporarily – is needed, sensible and prudent.

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