BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | SJR 19| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- THIRD READING Bill No: SJR 19 Author: Correa (D), et al. Amended: As introduced Vote: 21 SENATE BANKING & FINANCIAL INST. COMM. : 7-0, 4/9/14 AYES: Evans, Block, Correa, Hill, Roth, Torres, Vidak NO VOTE RECORDED: Berryhill, Hueso SUBJECT : High-cost loan limits SOURCE : California Association of Realtors DIGEST : This resolution expresses the Legislatures opposition to a reduction in the high-cost conforming loan limits used by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). ANALYSIS : Existing federal law establishes the Federal Housing Finance Agency (FHFA), and places responsibility with FHFA for overseeing Fannie Mae and Freddie Mac. This resolution: 1. Makes a series of findings related to the history of the high-cost loan limits used by the government-sponsored enterprises (GSEs; colloquially known as Fannie Mae and Freddie Mac), the conservatorship of Fannie Mae and Freddie Mac in 2008 by the FHFA, a December 2013 proposal by FHFA to reduce the national and high-cost loan conforming limits used CONTINUED SJR 19 Page 2 by Fannie Mae and Freddie Mac, and the adverse consequences that could result to California's housing market if the FHFA's proposal is allowed to move forward. 2. Expresses the Legislature's opposition to any reduction in the current national and high-cost conforming loan limits for Fannie Mae and Freddie Mac and urges the FHFA not to implement any reductions to these limits. 3. Urges the President of the United States and the United States Congress to join California in opposing any reduction in the national and high-cost conforming loan limits. Background Fannie Mae and Freddie Mac, collectively known as the GSEs, purchase and guarantee residential mortgage loans, providing the funding necessary to sustain the U.S. housing market. According to the most recent available data, 77% of all U.S. mortgages are owned or guaranteed by the GSEs. From January 1, 2009 through December 31, 2013, Fannie Mae (the larger of the two enterprises) provided approximately $4.1 trillion in liquidity, which enabled 3.7 million home purchases and 12.3 million mortgage refinancings. During the same time period, Freddie Mac provided approximately $2.2 trillion in liquidity, which enabled 2.0 million home purchases and 7.7 million refinancings. Fannie Mae and Freddie Mac have a limit (the "conforming loan limit") on the maximum size of loans they are allowed to purchase and/or guarantee. Generally speaking, borrowers who obtain conforming loans pay a lower interest rate than those who obtain "jumbo" loans (i.e., loans whose principal amount upon origination exceeds the conforming loan limit). For several decades, the GSEs had a single conforming loan limit for the contiguous 48 states. The national conforming loan limit for mortgages that finance single-family one-unit properties was $33,000 in the early 1970s. Periodic inflation adjustments increased this limit to $417,000 by 2006, a level at which it remained until 2008. These limits were 50% higher in four statutorily-designated high cost areas, including Alaska, Hawaii, Guam, and the U.S. Virgin Islands. Federal legislation enacted in 2008 established two sets of CONTINUED SJR 19 Page 3 conforming loan limits: general limits and high-cost limits. High-cost limits were intended to reflect the reality that housing costs vary across the U.S. and the concern that buyers in high-cost areas were disadvantaged by a conforming loan limit system that failed to reflect the significant variance in home prices across the country. Because jumbo loans traditionally carry higher interest rates than conforming loans, home buyers in high-cost areas were being doubly penalized by their choices of residence - once by the high cost of the homes in their areas and a second time by the higher interest rates they were required to pay on the jumbo loans they required to purchase those homes. The general conforming loan limit has remained at $417,000 since 2006. Federal legislation, including the Housing and Economic Recovery Act of 2008 and the American Recovery and Reinvestment Act of 2009, temporarily established high-cost loan limits at levels as high as $729,750. Those limits have since fallen to $625,500 pursuant to the provisions of that federal legislation. Individuals wishing to know whether their area is one in which the general conforming loan limit or the high-cost loan limit applies can look up this information on the FHFA Web site. This resolution addresses the question of whether those limits should be reduced further, or retained at their current levels. Conservation of Fannie Mae and Freddie Mac . In early September 2008, at the height of the U.S. mortgage market turmoil and shortly before the failure of Lehman Brothers and several other large financial institutions, both Fannie Mae and Freddie Mac were placed into conservatorship. Their conservation by FHFA was intended to shore up their finances and prevent a complete collapse of the U.S. housing market. By late 2008, most sources of private mortgage financing had fled the U.S. mortgage market in panic about high foreclosure rates. The GSEs' conservation guaranteed their continued existence and was one of many attempts taken by the federal government to calm the mortgage markets and help avoid an economic depression. In total, the federal government provided the GSEs with over $180 billion in taxpayer support following their conservation. As foreclosures have declined and the national housing market has recovered, considerable discussion has focused on the future of the GSEs. Myriad plans have been advanced by different CONTINUED SJR 19 Page 4 entities within the federal government, and a significant number of bills have been introduced in Congress, all with the aim of ending the conservatorship and replacing it with a more stable, long-term mortgage market framework. Most people believe that the federal government must reduce its level of support for the U.S. mortgage market, before private mortgage financing will return. However, to date, there has been no agreement on whether the GSEs should be retained, modified, or eliminated, how best to reduce their role in U.S. mortgage financing, nor even on the time frame in which those changes should occur. Prior to the financial crisis, private mortgage financing dwarfed public mortgage financing. As recently as 2006, Fannie and Freddie supplied 43% of the capital within the secondary mortgage market. Today, the federal government backs nine out of every ten mortgages, when the mortgage portfolio of the GSEs and the Federal Housing Administration are combined. Many believe that level is unsustainable in the long-term. The Obama Administration's Choice of GSE Resolution Plans . In February 2012, then-acting Director of the FHFA Edward DeMarco submitted a strategic plan to Congress setting forth objectives and steps that FHFA had taken or planned to take to meet FHFA's obligations as conservator. In that strategic plan, FHFA identified three strategic goals, including (1) building a new infrastructure for the secondary mortgage market, (2) gradually contracting the GSE's dominant presence in the marketplace while simplifying and shrinking their operations, and (3) maintaining foreclosure prevention activities and credit availability for new and refinanced mortgages. In December 2013, FHFA proposed to begin reducing GSE loan limits, in an effort to begin the slow process of shrinking the sizes of Fannie Mae's and Freddie Mac's portfolios, in anticipation of their eventual elimination. FISCAL EFFECT : Fiscal Com.: No SUPPORT : (Verified 4/10/14) California Association of Realtors (source) California Credit Union League California Independent Bankers California Mortgage Bankers Association CONTINUED SJR 19 Page 5 ARGUMENTS IN SUPPORT : The resolution's sponsor, the California Association of Realtors (CAR), believes that "any reductions to federal mortgage loan limit caps will limit California homebuyers from access to safe and affordable mortgages through Fannie Mae and Freddie Mac. Such a limitation, in turn, is certain to ripple through the entire housing market and have a negative impact on the larger economy." CAR observes that California has 15 metropolitan statistical areas (MSAs) that benefit from high-cost loan limits, including five MSAs (encompassing 11 counties) which benefit from the highest tier of high-cost loan limits. Those 11 counties include Alameda, Contra Costa, Los Angeles, Marin, Orange, San Benito, San Francisco, San Mateo, Santa Barbara, Santa Clara, and Santa Cruz. The California Independent Bankers writes, "Fannie Mae and Freddie Mac high-cost loans are important to California's real estate industry. As local lenders, community banks play a significant role in the housing market. If the cap on Fannie Mae and Freddie Mac high-cost loans is reduced under FHFA's proposal, tens of thousands of loans in California could be negatively impacted, including the mortgage loans of community bank customers." The California Credit Union League believes that reducing the loan limits could potentially cut off access to credit for California consumers or drive them to higher priced lenders. The California Mortgage Bankers Association is concerned about the impact of a reduction in the conforming loan limits. The housing markets remain fragile, and proposed changes risk further constructing access to credit and reversing progress made in the housing recovery. Many potential homeowners remain on the sidelines, unable to purchase a home or refinance their mortgages due to rising rates, tight housing inventory, and restrictive credit standards. In key housing markets, the proposed loan limit reductions could exacerbate existing problems. MW:dk 4/15/14 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE CONTINUED SJR 19 Page 6 **** END **** CONTINUED