Study predicts decline in loan limits to stymie recovery

A drop in some mortgage loan limits for the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac and the Federal Housing Administration scheduled to occur on October 1 will reduce housing demand and place downward pressure on home prices in major housing markets, according to a new study from the Economics and Housing Policy Group at the National Association of Home Builders (NAHB).

When they come up for sale, the homes that will become ineligible to be purchased and securitized by the GSEs or to be purchased with FHA-insured financing as a result of the lower limits “would likely require financing with higher mortgage interest rates and other less favorable loan terms, such as higher required down payments and more stringent credit history thresholds,” according to the report.

“The lower limits will place a constraint on home buying in high-cost housing markets, such as those along the coasts and in California. It is the last thing we need in a housing market that is still struggling to get back on its feet,” said Bob Nielsen, NAHB chairman.

The downward pressure on prices could extend beyond the homes directly affected by the lower limits, the study warns, because first-time and trade-up home sales are interrelated.

The size of “conforming” mortgages for the GSEs is currently limited to $417,000 in general, but that ceiling can rise to as high as $729,750 using a statutory formula based on local median home prices.
Unless Congress acts to extend these levels, they will revert to the lower permanent criteria for high-cost areas under the Housing and Economic Recovery Act of 2008.

The base limit will remain at $417,000, but the formula for establishing limits for high-cost areas will change from 125 percent to 115 percent of the area median home price, and the national ceiling will drop from $729,750 to $625,500.

Purchasing homes that go above the GSE ceiling will require non-conforming loans that currently have been about 60 basis points (0.6 percentage points) higher than conforming loans, the study finds, and based on a report by the Federal Housing Finance Agency (FHFA) the non-conforming mortgages are expected to be 50 to 75 basis points higher.

As with the GSEs, the national ceiling for FHA loans will drop to $625,500 on Oct. 1, and for counties whose housing is priced somewhere between that amount and the lowest ceiling of $271,050, the FHA mortgage loan limit will also decline from 125 percent to 115 percent of the area median.