Realtors, lenders and home builders are protesting a proposed method for calculating the conforming loan limit, saying federal regulators lack the legal authority to reduce the limit if housing prices decline.
The conforming loan limit determines the maximum size mortgage eligible for purchase by Fannie Mae and Freddie Mac, and is also used to set lower limits for FHA and VA loan guarantees.
The Office of Federal Housing Enterprise Oversight (OFHEO) proposes leaving the conforming loan limit at $417,000 in 2008, regardless of how steeply housing prices fall in 2007.
But in 2009, OFHEO wants to mandate that Fannie and Freddie lower the conforming loan limit if the cumulative reduction in average home price in 2006, 2007 and 2008 exceeds 1 percent.
The conforming loan limit is tied to the average home price as reported in November by the Federal Housing Finance Board, which said prices fell .16 percent in 2006. Most industry groups and economists expect average prices to drop more precipitously in 2007.
Standard & Poor’s chief economist, David Wyss, recently said he expects home prices will decline 8 percent on average between 2006 and 2008, hitting bottom in the first quarter of 2008.
The methodology proposed by OFHEO for setting the conforming loan limit would give home buyers and lenders some time to plan ahead for a downward adjustment. If prices rebound in 2008, OFHEO’s proposed method of setting the conforming loan limit could lessen the magnitude of any reduction in 2009, or avert it altogether.
But the prospect of OFHEO mandating any reduction in the conforming loan limit alarms the National Association of Realtors, the Mortgage Bankers Association and the National Association of Home Builders, who sent a joint letter Friday to Rep. Barney Frank, D-Mass., and Rep. Spencer Bachus, R-Ala., the leaders of the influential House Financial Services Committee.
“As you are aware, the housing sector is currently undergoing a correction, and there is concern about the availability of funds for the refinancing of loans and for new loans,” the letter said. “Reductions in the conforming loan limit could impair the ability of some borrowers to refinance out of subprime mortgages, which is of particular concern for families with problematic mortgages, as well as prevent some first-time home buyers from obtaining lower-cost financing on conforming, FHA or VA loans.”
Given the importance of the conforming loan limit to the housing industry, the groups said OFHEO should have published its proposed guidance for setting the conforming loan limit in the Federal Register. Comments on the guidance are due Thursday.
“Not only is the proposal bad public policy, it does not appear to be authorized under current law, which only permits increases in the loan limit,” the groups said.
OFHEO did not immediately respond to a request for comment.
But in publishing the guidance, regulators said Fannie and Freddie have been inconsistent in applying the rules for setting the conforming loan limit, which are spelled out in the Housing and Community Development Act of 1980.
OFHEO maintains Fannie and Freddie didn’t lower the 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 did factor in the price declines when it raised the conforming loan limit in 1998, OFHEO said, allowing a 3.67 percent increase despite the fact that average home prices climbed 8.44 percent the year before.