FBR Capital Markets anticipates that Congress will be unable to pass legislation to lower the loan limits below $625,500 until at least 2013, and expects that it could be even longer.
The current Government-sponsored enterprise (GSE) loan limits in high-cost areas are $729,750, which is 175 percent of the conforming loan limit of $417,000. This is a temporary provision that lasts until Oct. 1.
After Oct. 1, the loan limits adjust downward to 150 percent of the conforming loan limit or $625,500. For the $729,750 level to remain, Congress must pass new legislation.
If Congress does nothing, the loan limits are lowered to $625,500, which is permanent until Congress passes legislation that would lower or increase that amount.
There is a push supported by the housing finance lobby in Washington to extend the current $729,750 loan limits. They are arguing that lowering the loan limits now will harm an already fragile housing market.
"They are looking to attach an increase to the legislation being worked on that will keep the government funded beyond Sept. 30. Based upon conversations with our Washington contacts, we believe this effort will be unsuccessful," said Edward Mills, an analyst at FBR Capital Markets.
He said loan limits affect every part of the mortgage finance chain, but given the modest decrease in loan limits (representing only 2 percent of GSE loans and concentrated in high-cost areas), the overall impact will be limited.
Specific names with the biggest impact would be Hudson City Bancorp (NASDAQ: HCBK) and Astoria Financial Corp. (NYSE: AF), both largely jumbo lenders with significant production in New York, he said.
He said Hudson City's average loan originated in 2010 was $593,000, and Astoria's average loan originated in the first half of 2011 was $784,000. For many investors, part of the investment thesis on these companies is that GSE reform will remove their largest competitor, the GSEs, allowing them to grow with loans at higher rates and better spreads.
"The first step in this process is the reduction in the conforming loan limit to $625,500 in October. We view the drop in conforming loan limits as a key factor in stabilizing Astoria's loan runoff and slowing Hudson City's margin compression," said Mills.
To the extent that the $729,750 maximum is maintained, it would be a negative for Hudson City, Astoria and likely any lender with a sizeable portfolio of jumbo mortgages. Most lenders have much smaller portfolios, but at the margin, the continued subsidy of mortgage rates hurts profitability, he said.