Conforming Loan limits are currently at $417,000.  Anything below that is considered conforming and anything above that is considered a non conforming loan amount and is labeled "jumbo." 

Right now jumbo rates are significantly higher than those of conforming.  That's because Fannie Mae and Freddie Mac agree to purchase loan that are conforming.  Of course in order for them to purchase the loan the loans have to meet underwriting guidelines set forth by Fannie/Freddie. 

Because there is currently no liquidity in the secondary markets other then that guaranteed by Fannie Mae and Freddie Mac, anything that is not conforming (not going to meet the requirements to be purchased by Fannie Mae and Freddie Mac, has higher interest rates because they have essentially no buyers on Wall Street).

The problem lies in the fact that here in Southern California, a lot of areas have home prices that are higher than the conforming loan amounts.  So, it's been suggested in Congress that if the Conforming loan amounts were to be raised, less people would lose their homes because they would be able to refinance into better loans.  Since there is no appetite on Wall Street for anything non conforming, the non conforming programs are disappearing and the ones that are still here are pretty restrictive, making it difficult to refinance into a non conforming loan right now.   The thing is, right now people need to have the ability to refinance into a fixed loan.

By raising the conforming loan limits, you guarantee a purchaser on Wall Street.  You may say that the borrower can't afford the loan but I think you are wrong.   People now are losing their homes because the loan is adjusting upwards out of their control.  If they could refinane into something fixed, they would be able to budget their monthly income and plan accordingly because the fixed payment would be something they can count on.  But when you are adjusting with a max interest rate cap of 12 or 13% you are in big trouble.  With how nervous Wall Street is now, we are at a time when things are over tightened because of the general lack of confidence. 

Raising the conforming loan limits would significantly prop up the housing market and the mortgage industry which needs at this time some serious help until confidence returns and ultimately liquidity.