Maximum limits for government-backed loans clears the Senate

The Senate on Thursday night took the first step to reinstate maximum loan limits for Fannie Mae and Freddie Mac, a move housing advocates say will speed the struggling sector's recovery. 

Less than a month after new limits went into effect, the Senate agreed 60-38 — with support from eight Republicans — to approve an amendment to the minibus spending measure that would raise the top loan limits for Freddie, Fannie and the Federal Housing Administration to $729,750 through 2013. 

Fannie Mae and Freddie Mac started new maximum loan limits on Oct. 1, with the levels dropping to $625,500, making it more difficult for potential homebuyers to get loans in higher-priced areas. In some cases, loan limits may be as low at $550,000, based on the location. 

Sen. Robert Menendez (D-N.J.), along with several other senators including Georgia Republicans Johnny Isakson and Saxby Chambliss, backed the amendment. 

The increase would be paid for with a fee of 15 basis points per year on the higher cost loans, and would raise money for taxpayers $11 million over 10 years, $2 million in this fiscal year, according to an aide and a Congressional Budget Office report. 

The bill also could help increase returns to taxpayers as FHA audits for the past decade have stated that larger loans actually perform better and default at significantly lower rates than smaller loans, allowing the larger loans could actually improve returns to taxpayers. 

House Republicans have expressed opposition to raising the limits as part of an effort to remove the government as the main factor in the housing equation. 

The National Association of Realtors and National Association of Home Builders are heavily lobbying Congress to raise the caps, citing the sluggish housing market while arguing that the sector is a key component of the economic recovery. 

"Restoring the higher loan limits for the housing government-sponsored enterprises and the FHA will provide homeowners and homebuyers with safe and affordable financing while providing a much-needed boost to housing markets all around the country," said Bob Nielsen, chairman of the NAHB, in a Friday statement. 

"Congress must act soon to ensure that this measure is enacted into law," Nielsen said. 

"Otherwise, the current drop in mortgage loan limits will reduce housing demand, and place downward pressure on home prices in major markets. This will exacerbate the current housing downturn, trigger more foreclosures, impede job growth and endanger the fragile economic recovery."

In a Thursday release of existing home sales for September, NAR blamed the drop in sales in Western states on the lowering of limits. 

“Given the concentration of higher-cost housing in the West, particularly in California, many buyers were motivated to close in the months leading up to the changeover while they could still get low interest rates on conventional mortgages," said Lawrence Yun, NAR's chief economist, on Thursday.