The good news (to some), the Senate passed an economic stimulus bill which temporarily increases conforming loan limits in high cost areas:

Fannie Mae and Freddie Mac, the government-sponsored mortgage finance companies, will be allowed to buy loans worth as much as $729,750 in expensive markets, an increase over the current $417,000 loan limit, a move that could help struggling homeowners to refinance large mortgages at a lower interest rate.

The bad news (to most), the reason why:

Economic growth in the fourth quarter slowed to a 0.6 percent pace, and U.S. employers cut jobs in January for the first time in four years, raising concern among some economists that the economy may slip into recession.

Senate Approves $151 Billion Economic Stimulus Bill [Bloomberg]
Senate Advances Stimulus Plan Without Any Loan Limit Adjustments [SocketSite]

45 thoughts on “Senate Passes Bill To Temporarily Increase Conforming Loan Limits”
  1. I’m very interested to see if this has any chance of working at all.
    I don’t believe it will help one bit, unless they relax fannie/freddie’s lending criteria.
    the head of OFHEO (the regulating body of Fannie/Freddie) argued against this raise in limit unless STRICTER lending guidelines were used.
    the issue isn’t that QUALIFIED jumbo home buyers can’t get a loan… or even that they have to pay 0.5-1% more for their loan… the issue is that the UNQUALIFIED (no income, no asset, stated income, high LTV and so on) buyers can’t get a loan.
    so it won’t help if Fannie/Freddie are opened up to them, if the unqualified borrower can’t qualify…
    thus, soon I expect we’ll see lending guidelines RELAXED so that the big banks can refinance their crap loans and put them on Fannie/Freddies books. then the big bank executives can pocket huge bonuses.
    then 3 years from now Fannie/Freddie will “surprisingly” go bankrupt, (they’re probably already insolvent) and they will be bailed out in an S&L #2 type scenario.
    there is no free lunch. San Franciscans simply CANNOT AFFORD the home prices in San Francisco. no amount of loan trickery will make it otherwise.

  2. Tom:
    just because you’re locked doesn’t mean you can’t shop around.
    I locked my loan for 5.5% (back in 2003). then between the time I locked and closing it dropped to 5.125% so I took that instead.
    if you close after the new rules go into effect you may qualify for the lower rate.
    But there is still debate as to whether or not Fannie/Freddie will WANT to give loans in CA anyway.
    (just because they are able doesn’t mean they want to)
    that said, there is intense pressure from the govt right now to FORCE Fannie/Freddie to lend in CA, NV, AZ and FL so who knows…

  3. ex-SF-er… yes, I am with you.
    This does nothing to help the people who really need help (not advocating anyone SHOULD help them) as intended by the writers of this bill. It helps only people I know who have cash or tons of equity and are going to buy a distressed property or refi.
    If people can barely or cannot qualify and afford based on 95-100% LTV and 45-50% max DTI, how are they gonna qualify for conforming with the 80% max LTV and 35% max DTI? LOL!
    This stuff is hilarious.

  4. Ex SF-er is right here: the legislation for RTC II is FOR SURE being drafted right now, and you can also be sure that there will be intense pressure to relax lending requirements.
    All that being said, none of this will stop housing values from falling towards a much lower equilibrium, as the non-stop credit inflation from 1982 onwards is now going into reverse. Once the deflationary mindset takes hold, nothing can stop it. The only “hope” for our sick economy is that the Fed by chance inflates another asset bubble by driving rates down (just as housing was inflated after the collapse of th equity markets following 2000). This is doubtful, but in any event just further misallocates scarce capital and ensures an even greater crash. Oh well, that’s the game I guess….
    Although increasing Fannie/Freddie loan limits (together with expansion of FHA) will ultimetly slow the decline IMO, I actually think that in the SHORT TERM (meaning the next 6-9 months), increase in the limits will SPEED UP the decline in median price and make the decline in values in places like SF, LA and NYC environs more obvious. There will be a certain “reliquification” of the market in the $500K-$1MM price ranges and this should speed the process of price discovery. In other words, more “comps” at lower than previous prices leading to less distortions when looking at median price changes.

  5. Might the belief (erroneous, I think) that far better interest rates will be available just a few months from now bring an already slow market to a grinding halt?
    I did not expect the heartland senators to go along with this. I’m very curious to see whether it has any of the intended effects, and what unintended consequences result.

  6. Satchel is right. All those lame “appraisers” will be under a lot more scrutiny this time around except the pressure from the lenders will be in the opposite direction. I know a few people who bought in 05 and 06 that have openly expressed concern over getting an appraisal for fear of having to face the truth. Perhaps that is the truth about the SF market that is about to be revealed for all to see in the data.

  7. I’ve personally talked to alot of people who are going to use this as an opportunity to refinance to a lower rate. They aren’t cash-strapped or subprime, but they did buy in the last couple of years and can now get finance at a lower rate. I’m not suggesting this is a silver-bullet, but it should help put more money in people’s pockets. If that happens, then why wouldn’t this actually help stimulate the economy? This should also have a positive impact on the Bay Area market in particular. Not everyone with a jumbo mortgage is at risk of default, but everyone could benefit from lower mortgage payments.
    You can argue for or against the merits of Fannie/Freddie, but it’s hard to argue that lower mortgage payments mean more discretionary spending. That’s the whole point of the stimulus package.

  8. Lance,
    “I’m not suggesting this is a silver-bullet, but it should help put more money in people’s pockets. If that happens, then why wouldn’t this actually help stimulate the economy?”
    You’ve hit upon one of the many thorny problems in macroeconomics, and to give you a real answer would take a book. But, in essence, what you are advocating is subsidization of the cost of homeownership by the larger economy. We have had this distortion for a while. Ultimately, this leads to higher asset prices (higher home prices) and massive misallocation of otherwise scarce capital to assets that would not otherwise attract the capital. The “extra money” is a mirage, really. Remember, any “extra money” that is in people’s pockets because of lower than equilibrium interest costs is money that is not in lenders’ pockets. Had that money been in lenders’ pockets, it would be used to invest in more productive assets. Notice that there was a time when the US built productive factories and was a new creditor country?
    Lower interest costs also contribute to a mispricing of home assets (house prices too high), which creates all sorts of nonproductive distortions. One of which will be that builders will continue to build more and more housing developments, so long as house prices are above equilibrium (notice that land prices have crashed – vacant lots in parts of Florida and the Central Valley, for instances, are up to 50-90% less than they were two years ago!). Builders will build more housing now at lower prices, further misallocating scarce capital, essentially because home prices will not adjust downwards as quickly as the vacant lots, raw building materials and labor has, again because the Fed is trying to slow the adjustment of the visible asset – the home itself – in order keep people paying on a depreciating asset. This additional building will continue, even though the Census has just reported that the vacancy rate of homes in America is now higher than at any point since the Great Depression. I fully expect that within a year or two, the USG will fund the bulldozing of complete housing developments that were built in 2004-2007 and which remain empty to this day. At that point, the massive waste and unproductive misallocation of capital should become evident to everyone.
    Last, about people having more discretionary dollars being stimulative. There’s no such thing as a free lunch! If it were that easy, why wouldn’t the government just print up, say, $10,000 and distribute it to everyone? Remember, any benefit received by a homeowner is a detriment to lenders and investors, which are the true drivers of a well-functioning economy.
    Anyway, like I said, one could write a book about it, and even that would not do the topic justice, but those are some hints as to why these sorts of dog-and-pony shows (like lowering jumbo rates through implicit Federal guarantees, or borrowing more $$ to distribute $600 and $1,200 checks to consumers) are just sideshows and ultimately are going to prove to be detrimental to our economy.

  9. Lance,
    Are you saying all of these ppl you know put 20+% down and can meet the current conforming underwriting guidelines – max 35% DTI, full doc?
    Depending on where they purchased, they almost better have put 25-30% down to be sure to qualify I would say…
    I am curious to see if Fan/Fred do actually ease on these guidelines.

  10. Satchel, bulldozing has already started..Check this story which I read long time back about Ohio’s measures to stem foreclosures and home price adjustments.
    City/County governments use their emergency funds to bring down vacant homes, and they raise taxes to fund social programs. If they use the current revenue properly they don’t need more taxes…
    Even though I am a liberal democrat, I hate the choices i got right now. I wish there was some one with democratic views and Ron Paul policies….

  11. Lance,
    You hit the nail on the head. I am one of those people who get to refinance about 50bps lower, and save about $350/month. But not only that, the principal portion of the loan increases by $130/month, and the interest rate portion decreases by the same amount.
    I’m only one guy who’s saving an extra $350/month. That’s about $500 in gross income a month. Think about the hundreds, or thousands of SF residents who get to refi as well. This is great news.

  12. “but it should help put more money in people’s pockets. If that happens, then why wouldn’t this actually help stimulate the economy?”
    It will help put money in people’s pockets, and it may be stimulatory (but who knows how much)
    the problem, as Satchel says, is that there is no free lunch
    If it were that easy, then we would simply drop interest rates to 0% and give everybody $1 million a month. Then we’d all be rich.
    Except that we’d have to get the $1M a month by borrowing or by creating the money
    and that by giving everybody $1M, then the price of everything would simply raise to match that.
    example: if there are 10 people on earth, each with $1, and there are 10 products on earth… then each product would cost $1.
    If you give each person $99 then you have 10 people who each now have $100. There are still 10 products on earth… are they richer? No. now the products each will cost $100.
    that is what is happening today.
    The Federal govt is giving away money. some of it is simply created… some of it is borrowed (from other governments or from our children as debt). But it has to come from somewhere.
    This is why the dollar is at near-all time lows against all other currencies, part of the reason why commodities (i.e. FOOD) is at near all time highs, gold is at an all time high, oil near all time highs. the more money we “give” away, the LESS valuable that money becomes.
    So how much does it help a person if we give them money to pay on an overpriced house (in the form or rebate check or artificially low interest rates), if it makes everything else (food transportation health care etc) unaffordable?

  13. This conforming lift will do more than any single $600 tax rebate ever will. Think about it. You get $600 back, great. But, if u can refi your jumbo loan that’s at 700K own 1%, you save $7,000/yr…. for 30 years on a 30yr fixed!
    $600 one time kick, or knowingly you’ll save $210,000+ over the life of your loan? There is no contest there.
    This increase is secretly a tax subsidy for the rich bc if you have a $730,000 mortgage for example, you should technically have a $150,000++ income.

  14. ex SF-er,
    You’re basically right about how money creation (printing) will affect prices, but don’t get too worried yet! There’s no real printing going on (look at the scale and note the rates of money creation in the table below):
    Gold and food prices are not really responding to monetization IMO; lots of other dynamics going on.
    But it bears watching!! All of us bond guys watch this stuff like hawks! If and when the monetization starts in earnest, you’ll know it. It will be right around the time that interest rates shoot up to the moon, truly collapsing housing (because it is so leveraged, and because people will have very little money to pay on high interest rate mortgages when all of their cash is being drained by the skyrocketing prices of food and fuel)! It will also be right around the time when stocks go down and stay down (lots of people forget that the Dow for instance went from something like 1000 in 1966 or so to 777 in 1982 or so – tha’s what high inflation does to asset values).
    I’ll say it again, the real value of housing is going to go much lower, whether we have high inflation or deflation. If you own a house, or you are buying one, in order to hedge against either scenario, make sure that you are 100% leveraged in the asset – use as little of your own money as possible. In hyperinflation, the real value of your debt will plummet, and so you won’t care that the real value of your house has crashed as well. In deflation, again, the real value of the cash you just extracted from your home will be king, and you always have the option of throwing the keys on the roof and walking away if both the real and nominal value of your house has crashed in deflation. Tough to tell which way we’ll go frankly. FWIW I’m leaning towards deflation (but fairly mild deflation) and coordinately large nominal drops in house prices.

  15. Lance and Laker, don’t spend that extra $350/mo just yet. The Wall Street Journal had a good article today about this expansion aptly titled “New definition of jumbo loans may help few.”
    A few issues to sort through:
    The bill limits the new ceiling for Fannie and Freddie guarantees to mortgages originated between July 1, 2007, and Dec. 31, 2008. But the GSEs have no plan yet to enforce the new rules. They must set aside capital for every mortgage they own or guarantee, but both are insufficiently capitalized. And their regulator, the OFHEO, does not like this legislation because of the additional risk to the companies. “Given the time needed to implement the law, make new mortgages, get Fannie or Freddie guarantees, turn them into securities and get the new market for those securities functioning, the number of mortgages that could actually benefit before Dec. 31 may be disappointingly small.”
    This also could end up increasing the rate that homeowners with the smaller mortgages have to pay, because it would up the risk for the whole package of loans. Those with jumbo mortgages are quicker to refi when interest rates dip, which makes these loans less attractive to investors. They also tend to borrow a higher proportion of their home’s value. Also, Fannie and Freddie have already recently upped the fees they charge and could raise them even more for the higher loans. A guy from Barclays predicted this could bring “mini-jumbos” to .20 or .25 points of the rates on conforming loans (and the latter might rise).
    So this could be a little boon to those wishing to refi — probably not a 1% drop but maybe half that or a bit better (or worse). And I don’t see how it will have much of an impact at all on sales given the strict LTV requirements. But time will tell.

  16. In hyperinflation, the real value of your debt will plummet, and so you won’t care that the real value of your house has crashed as well. In deflation, again, the real value of the cash you just extracted from your home will be king, and you always have the option of throwing the keys on the roof and walking away if both the real and nominal value of your house has crashed in deflation.
    All this apocalyptic gloom and doom! Sorry, I just don’t see it. Housing price may (will?) go down, they may go up. If housing prices lost 20% of their value is that the end of the world? No. I owned a condo (bought in 2000) that went from 695K to 585K (based on comps) and then back up to the high 800K range. The housing market is not a perfect market, there’s way too much emotion involved for that. Will people lose money and be booted out their homes? Yes. Are we looking at a Japan-style decades long deflation? I highly doubt it.
    If everyone is so sure about the impending catastrophe, how about some predictions? I say median prices down 10% nationally, in high price areas 15%, with a few pockets (Miami, Riverside) lower. Flat prices through 2009, then they start rising at a moderate pace.
    Oh, and no rioting in the streets 😉

  17. I’ve been searching for quite some time, but I can’t seem to find the complete list of criteria for a conforming loan. I know 20% equity and the amount limit, but can anyone point me to a list of other criteria?

  18. Satchel:
    although I agree with you that we do not have money creation, it doesn’t mean we don’t have domestic inflation AS A DIRECT RESULT of current monetary policy.
    with the Fed dropping rates so low, yesterday we saw the refusal of foreign govt’s to finance our debt.
    if this continues, we could see repatriation of dollars to the US. this would cause price inflation here WITHOUT monetary creation.
    also, we have been exporting inflation to China (and the Middle east) for some time. as time goes on, the chinese are increasingly forced to raise their prices… again price inflation here.
    and also the dovish Fed has much blame for why the dollar index went to basement levels versus all currencies.
    thus, I disagree with your assertion that we don’t have to worry about what’s been done to date. True, there is no true monetization. but that doesn’t mean that we aren’t seeing price inflation today.
    (and as I wrote, this is only PART of the reason why we see increases in Oil, commodities and gold).
    all I know, is that my net worth dropped SIGNIFICANTLY over the last year if I price my net worth in anything other than US$. (gold, pound, euro, mexican peso, canadian $, swiss franc, you name it).
    I stand by my claim, there is no free lunch.
    the money that will artificially drop jumbo mortgage rates is coming from SOMEWHERE. the money that will come for the tax rebates must come from somewhere as well. find out where, and you’ll see if you personally will benefit or not.

  19. There may be no free lunch, but since lunch is coming regardless, you have two choices:
    -figure out the way to get the choicest cuts of meat on the table
    -don’t eat and pay anyway
    If you’ve got a jumbo and can refi into a conforming, you are dancing in the streets. Yesterday you had 20% equity, at least, and you were happily and easily paying your mortgage. Today, you’re wondering what you’ll do with that $500 a month that may be coming to you for the next 30 years. Enjoy.

  20. Here is some interesting reading, dumbed down for the rest of us if you haven’t been able to follow Satchel and SF-er musings…

    Um, you might want to take that site with a shaker of salt, it’s basically a far left wing nut site:
    “The Centre for Research on Globalization is a journalistic and informational organization run by Canadian economist Michel Chossudovsky. It regularly publishes articles from an anti-globalization stance, as well as investigative research into conspiracy theories about the 9/11 attacks.
    Other articles on the Centre’s website include conspiracy theories about Middle Eastern and African affairs, including claims that the U.S. was behind the genocide in Rwanda[1] and going so far as to deny the Rwandan Genocide altogether.[2]”

  21. @ timkell:
    It was published in the Opinion section, the guy (and the site) is a nut case. Not that there aren’t valid points buried in there somewhere, but I’d hardly call it a reliable source for anything.

  22. Anon –
    The ad hominem fallacy is, in fact, a fallacy. Please argue against the article based on facts rather than trying to dismiss it with smears.
    The central thesis is that Freddie and Fannie are not solvent. Given the hundreds of billions of dollars of mortgage write-offs we’ve witnessed over the passed year, and the fact that Freddie and Fannie’s entire business involves buying and insuring mortgage, do you really think that’s a wild claim? Seriously??

  23. @Mike:
    Well, how about starting with the fact that how many “rich” people will this really help? Is everyone taking out a 700K loan rich? Does that mean we’re all subsidizing all the “rich” people in Alaska and Hawaii with their higher conforming loan limits?
    The line about people having to do without a Lexus reminds me of Reagan’s “welfare queens” driving Cadillacs. Again, he’s got some points, but the hyperbole is absurd. And besides, I believe this is only for 2008. And the government bails out homeowners (FEMA, insurance) and business (S&Ls) all the time. That doesn’t make it right, but it’s not a grand conspiracy.

  24. It would be a wild claim to think that Fannie/Freddie actually IS solvent.
    Fannie retains or guarantees over $2.5 TRILLION of mortgage securities. Its capital is less than $40 BILLION (tough to tell how much less – maybe if they filed audited financials like EVERY OTHER public company, we’d know). That is a leverage factor of about 62X. Put another way, if the fair value of their loan assets declines by more than 1.5% they are balance sheet insolvent. The assets consist almost entirely of residential mortages, secured by US properties. The US has now undergone a price decline on a national basis for the first time since the Great Depression. And the decline (according to OFHEO data, as well as Case Shiller) is accelerating. Yet, we are to believe that a greater than 1.6% decline in asset value is a wild claim?
    Come on, they’re bankrupt. They will be bailed out. 100% certain. When it happens, even stricter regulations will be placed on loans, and the REIC generally (just as in the 1930s when Congress “disciplined” the equity markets, following the crash of 1929 and its aftermath). The ultimate impact on home prices is not likely to be what people expect. It took stock prices almost 25 years to regain their bubble peak high. And stocks generally appreciate much more quickly (on average, 5-7% above inflation – various estimates) than residential real estate (0-2% above inflation, depending on region).

  25. If you are taking out a 700k loan, then your household should have a income of around $200,000/year (see, for example, ).
    That would easily put you in the top 5% of US households in 2006. If they’re not the ones buying Lexuses, I don’t know who is. You seem to be the one generating the hyperbole here!
    So if you take out the $700k loan, either you are rich, or you have borrowed far more than is prudent. In which case, yes, I do not think the govt should be in the business of bailing out speculators.
    Incidentally, the article never once uses the word “conspiracy.” The closest it gets is “scam,” and honestly, I don’t think that’s too strong a word to describe what is going on (you’ve got a ton of bad securities, and the lenders effectively want to privatize the gains but socialize the losses). Again, please stick tot he facts.

  26. @Mike:
    I don’t think a 200K HHI in NY, SF, LA is “rich.”
    And are you saying that EVERYONE who will be taking out a 700K loan is not being prudent or is a speculator? That makes no sense.
    Again, I don’t see that it’s that big a deal. It’s only for a 9 months, and it’s just an increase in the confirming loan limit (which has happened many times before).

  27. What’s wrong with raising the limit to any amount… as long as lending standards are preserved (or tightened), the conforming limit could be $10 million for all I care …
    Nothing wrong with writing huge mortgages to people who earn tons of money and can service the debt.

  28. “So why does it need a GSE guarantee to do it then?”
    “What’s wrong with raising the limit to any amount… as long as lending standards are preserved (or tightened), the conforming limit could be $10 million for all I care …”
    I agree. which is why my central idea (far above) was that soon the GSE’s will relax lending standards.
    it doesn’t help the banks to take the good loans off their books and put them in the GSE’s. it only helps to take the BAD apples out and put them in the GSEs.

  29. @ ex SF-er,
    With large (well qualified) loans the main risk to the lender is not default, it is pre-payment.
    If you loan $10MM to someone on a 30yr fixed and rates come down even a fraction of a percent their monetary gains from doing a re-fi can be huge, easily hundreds of thousands over the term of the loan for just 1 basis point change.
    If you lend $500K to someone their monetary incentive to re-fi is much less for such a small change in rates.

  30. Fannie and Freddie are already imploding. Reports are out today that its existing portfolio is decaying, and they are reporting continuing big losses. I’m not sure they will be able to hide their insolvency long enough to become a pass-through for any significant new lendings to permit the stealth government bailout that is being attempted here.

  31. With large (well qualified) loans the main risk to the lender is not default, it is pre-payment.
    Renter. This is true. The caveat: WELL QUALIFIED.
    The loan quality of the 2004-2007 Jumbos is poor. They have a very high default rate compared with the past. Precisely because the loans are NOT well qualified. (the jumbo space saw tons of poor underwriting… don’t believe the hype… this is NOT a “subprime” problem… it is a total loss of credit quality problem)
    this is why the loans are getting slaughtered in the secondary market. Everybody knows the dirty little secret: AAA ranked securities made up of Jumbo loans are really not AAA… they are performing just above or at junk status. so nobody will buy them. so it ground to a halt.
    IF Fannie/Freddie keep their current guidelines, then they will do fine expanding to the Jumbo space. However, that’s NOT where they are needed. They are needed in the NON-liquid space, which is the craptastic loans.
    thus, they will be forced/impressed to loosen their guidelines.
    and then the defaults will roll in.
    Let’s think about this the right way:
    Q: why is the gov’t falling all over themselves to “save” homeowners?
    A: because the homeowners are defaulting in record numbers
    Q: why is the govt falling over itself to save jumbo-loan holding homeowners?
    A: because homeowners with jumbo loans are also defaulting in record numbers
    Q: are the govt actions then meant to help well-qualified people in jumbo loans so that they can get a few hunderd $$$ more a month in their pocket, or to try to help the underwater deep in doo doo homeowners?
    A: the deep in doo doo homeowners.
    Q: how can Fannie/Freddie help this if they only extend their loans to well qualified homeowners
    A: they can’t.

  32. i stumbled onto this site while trying to find information on mtg. my wife and i are in the market to buy a home. we found one for $499,000 and plan on offering $417k. we decided on that number because 1. its a short sale and we figure we can low ball and 2. we dont want to pay more and have to get a jumbo interest rate. when will the new amount go into effect? should we just wait for the conforming loan amount to rise or could we refinance if we buy now?

  33. I would be completely shocked if someone accepted an offer of $417,000 on a short-sale property priced at $499,000. I have a feeling you guys will lose a few ‘low-ball’ offers in your search for a bargain. This is what happens to most people.
    Why don’t you find a good agent in DC to help you?

  34. Since I’ll be moving this summer, I need to figure out WHEN the new conforming limits will be increased (pursuant to the stimulus package). While most articles refer to the silly little tax-rebate checks, it seems that nobody is discussing the practical realities of the (albeit-temporary) increase in FannieMae/FreddieMac conforming limits. HELP!!

  35. Does any one know if the conforming limts have been raised or when they will . I am in the market for a $ 575,000 Mortgage in the Ny area .
    Also I do not understand how anyone can think this is not a good thing to allow familys to keep more money pre month in their own pockets. Most people are not rich looking for morgages over the current limts which are just to low in certain areas .
    Mike R,

  36. Can someone explain exactly how this conforming loan limit increase will help? According to every mortgage person I have talked to, the loan limits have been raised, but, for instance, if you borrow over the $417,000 loan limit for a conforming loan in California (even though it has been raised to 729,000), your interest rate would be the same as a jumbo loan. So how does this help? You’re not getting any better of an interest rate. It seems to me, that it helps the banks and not the consumer.

  37. Loan limit increase did absolutely nothing to help because the wholesale lending institution added an adjustment to get that increased limit. So much of an adjustment that the rate ended up being more than what the normal jumbo rate is.
    Go Figure!!!!!! maybe the rich people don’t want to loose their money!!! And since they payoff the government officials, no one is going to do anything about it.

  38. I have a California construction loan of 490K that needs to convert to a permanant loan before Dec.08. Will I be able to take advantage of the new conforming loan/limits? And what will the requirements and rates be? I think I built at the wrong time.

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