Armando Falcon Jr., director of the Office of Federal Housing Enterprise Oversight, has issued a Supervisory Guidance establishing a regulatory process for annual adjustments to the enterprises’ conforming loan limit.

The guidance, which lays out procedures to be applied to computations of future conforming loan limits, follows a review of concerns raised by the 2004 loan limit calculation.

In that review, OFHEO determined that the 2004 limit adopted by Fannie Mae and Freddie Mac failed to incorporate a necessary adjustment factor brought on by methodological changes in the Federal Housing Finance Board’s Monthly Interest Rate Survey (MIRS). The improper calculation resulted in a conforming loan limit of $333,700 dollars, which is $2,300 higher than it would have been if this adjustment had been made.

In a letter and the guidance to the enterprises, Falcon said the adjustment that should have been made in 2004 will be incorporated into the 2005 calculation. From now on, OFHEO will announce its annual calculation of the maximum conforming loan limit based on the MIRS survey. OFHEO will consider the purchase by Fannie Mae or Freddie Mac of any mortgage above that amount to be an unsafe and unsound practice.

“It is now clear that the informal procedure currently used for annually adjusting the conforming loan limit is inadequate and a new, formal supervisory process is warranted,” said Falcon. “It is my feeling that these steps will minimize future risk and ensure a fair and accurate calculation that will benefit the nation’s consumers and housing finance markets.”

***

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