Federal regulators are proposing to leave the conforming loan limit for single-family homes at $417,000 in 2008, regardless of how steeply housing prices fall this year.
The conforming loan limit — which determines the maximum size mortgage loan eligible for purchase by Fannie Mae and Freddie Mac — is tied to average home-price statistics released each November.
To provide greater certainty for mortgage lenders and home buyers, last year OFHEO said it would allow the conforming loan limit to stay put at $417,000 in 2007, even if home prices fell in 2006.
When the Federal Housing Finance Board (FHFB) announced that home prices had declined by a nearly imperceptible .16 percent, OFHEO did what it said it would, deferring what would have been a corresponding reduction in the conforming loan limit to $416,300.
Now OFHEO proposes leaving the current limit in place next year if prices fall again in 2007, to provide lenders and home buyers with a year of lag time to prepare for any decrease in the conforming loan limit driven by further price declines.
The National Association of Realtors projects the median price of existing homes will fall by 1.3 percent in 2007, and many experts expect sharper declines.
The FHFB’s average house price is based on a survey of lenders making conventional, single-family, fully amortized, purchase-money loans and excludes FHA-insured and VA-guaranteed mortgages, refinancing loans, and balloon loans. Although NAR tracks median home price and FHFB looks at average home price, both follow similar trends.
Whatever the decline in average home price in 2006 and 2007 turns out to be, it may not show up in the conforming loan limit until 2009 — if at all.
That’s because the method OFHEO proposes to use in setting the conforming loan limit would allow it to remain unchanged again in 2009 if home prices recoup some of their losses in 2008.
If average home prices were to fall by 1.3 percent this year, for example, OFHEO proposes to take the cumulative decline from 2006 and 2007 — 1.46 percent — and apply it to whatever changes occur in home prices next year.
If average home price fell by 1.3 percent in 2007 and remained unchanged in 2008, for example, the conforming loan limit would be adjusted down 1.46 percent in 2009.
But if the combined decline for 2006, 2007 and 2008 totals less than 1 percent, then the conforming loan limit will remain in place again in 2009. In other words, if average prices fall 1.3 percent in 2007 and then rebound by as little as .47 percent in 2008, the conforming loan limit would stay at $417,000 in 2009.
In effect, OFHEO regulators are saying that an adjustment of less than 1 percent is too insignificant to saddle lenders and consumers with, and the law gives OFHEO the discretion to postpone such adjustments.
“People like time to implement changes to their systems,” said OFHEO General Counsel Alfred Pollard. “All this today (loan origination) is done with computers — nobody’s got a hand-held calculator. The idea was to give them time to know what’s coming, and allow borrowers to get in under the wire” of any changes, Pollard said. “We felt that changes in the range below $4,000 — why change the system for $4,000 going down? The way the statute is written, we felt that’s where (lenders and borrowers) could be accommodated.”
What happens if prices go up? In the unlikely event that prices go up in 2007, the 2008 conforming loan limit would be bumped accordingly — after first subtracting the 2006 decline. After subtracting the .16 percent decrease in average home price registered in 2006, a hypothetical 1.3 percent increase in the 2007 average home price would net a 1.14 percent increase in the conforming loan limit in 2008.
If the average price in 2007 goes up less than the .16 percent drop registered in 2006 — by .10 percent, for example — the resulting .06 cumulative price drop for 2006 and 2007 would not meet the 1 percent threshold, and the decrease would be carried over to 2008.
Since 1981, Fannie and Freddie have set their conforming limits using methods spelled out by Congress in the Housing and Community Development Act of 1980. But, according to OFHEO, the government-sponsored entities (GSEs) haven’t consistently applied those rules.
According to OFHEO, the GSEs failed to lower the conforming loan limit after home prices declined in 1993 and 1994, leaving it unchanged at $203,150 despite a 2.96 percent decline in house prices in 1993 and a 1.46 percent drop in 1994.
Fannie and Freddie later compensated by raising the conforming loan limit by just 3.67 percent in 1998, after average home prices climbed 8.44 percent the year before, OFHEO maintains.
In 2003, the GSEs disregarded adjustments to housing price statistics by FHFB, OFHEO maintains. Regulators say Fannie and Freddie relied on unadjusted numbers in boosting the conforming loan limit by 3.41 percent, when the national average house price, after adjustments by FHFB, rose only 2.71 percent the year before.
In 2004, OFHEO determined a more formalized process for setting the conforming loan limit was needed.
After FHFB announces the year-over-year change in average housing price in October, OFHEO announces the new conforming loan limit. Technically, Fannie and Freddie decide whether to set their loan limit at or below that level. But in practice, they have set the conforming loan limit at the maximum determined by OFHEO.
OFHEO considers the purchase of any mortgage above the limit by Fannie Mae or Freddie Mac “an unsafe and unsound practice, running contrary to statute.”
OFHEO is seeking comments on its latest proposed guidance for setting the conforming loan limit until July 19. Comments should be addressed to Alfred Pollard, General Counsel, OFHEO, at firstname.lastname@example.org.