by Calculated Risk on 8/08/2007 12:14:00 AM

Mathew Padilla at the O.C. Register reports on comments from Impac Mortgage CEO Joseph Tomkinson:

Tomkinson said regulators need to let the GSEs buy loans greater than the $417,000 conforming loan limit today. The market needs liquidity and the limit doesn’t reflect current home prices, he said. He’d like to see it raised to somewhere in the range of $500,000 to $550,000.

Perhaps the conforming limit "doesn't reflect current home prices" because the prices are too high, and are based on the excessive speculation of the last few years. Here are the historical conforming loan limits including the higher limits for certain high cost areas.

And from the WSJ: Big Fans for Fannie, Freddie

Sen. Christopher Dodd (D., Conn.), chairman of the Senate Banking Committee, yesterday called on the companies' regulator to consider raising the caps placed last year on the amount of mortgages and related securities Fannie and Freddie can hold, as a way of ensuring that plenty of money is available to fund mortgage loans.

Sen. Charles Schumer (D., N.Y.) also called for higher caps. Both Fannie and Freddie are pushing for the same move. A spokeswoman for their regulator, the Office of Federal Housing Enterprise Oversight, or Ofheo, said the agency will respond to the senators shortly.

Are Fannie and Freddie really "pushing for the same move"? I don't think so (see Freddie's Syron's comments)

And this suggestion does not make economic sense. House prices in many areas are currently unrealistic when compared to incomes, and the sooner prices return to more normal levels, the better for the economy.

As Tanta noted in Conforming Loan Limits: The Subprime Excuse

"... it's also a question of mission or mandate for Fannie, Freddie, and FHA: these government-sponsored enterprises and agencies have always been mandated to provide liquidity to the low-to-moderate (moderate meaning "average") housing market, not its high end."

Back to the WSJ:

Joshua Rosner, an analyst at the New York research boutique Graham Fisher & Co., describes as "mass delusion" the idea that they can save the day for investors exposed to billions of dollars of ill-advised home loans now heading toward foreclosure. For one thing, he says, Ofheo has required Fannie and Freddie to follow stricter standards, recently imposed by banking regulators, in assessing borrowers' ability to repay. So they can't buy up loads of reckless loans to speculators or people failing to pay bills.

Richard Syron, chief executive of Freddie, agrees that there are limits to what his company can do. "Neither we nor anyone else can buy at par loans that probably shouldn't have been made in the first place," he says.

I think Syron is correct, these are loans that "shouldn't have been made in the first place" - and there is no reason to bail out the investors who bought those loans - or the lenders who made them.

It might be reasonable to have different limits for different areas, based on the median income for each area. As an example, a low to moderate income in California is much higher than a low to moderate income in Mississippi, and the loan limit should probably reflect the median income in each local Metropolitan Statistical Area (MSA). This might be something worth discussing over the next few years as house prices decline, but I suspect that will mean lowering the limit in Missisippi, not increasing the limit in California.