The hoopla over this issue occured last week but I have been trying to wrestle with it.
The agency who was responsible for oversight of Fannie Mae and Freddie Mac, who had essentially evolved in rubber stamp agency for the GSEs (government sponsored enterprises).
These enterprises seemed to have free reign in their dealings with the mortgage markets. The risk taken by these government enterprises started to balloon and the reported earnings were being manipulated to enhance compensation by their officers. I guess that means that the competitive advantage these enterprises have over their secondary market competitors breeds this sort of behavior. GSE’s have been a stabilizing factor in the mortgage markets in general. Thats why mortgage rates are relatively uniform across the country by property type.
After the Fannie Mae accounting scandal evolved a few years ago, OFHEO started to wake up and re-take control. One of their first public actions was initiated, after a miscalculation was made by Fannie Mae in calculating conforming loans limits, OFHEO took over this role as well (as well they should). It was off by a few thousand dollars, which is probably not a significant issue, but the symbolism of OFHEO’s actions was what I found important to maintain the trust and integrity of the US mortgage market.
Last week, OFEHO (incorrectly presented by the LA Times as Fannie and Freddie making the decision) kept the [loan limit of conventional mortgages unchanged [LA Times]](http://www.latimes.com/business/la-re-limit3dec03,1,7881568.story):
The conforming loan limit, perhaps the most intently watched number in the mortgage business, will remain unchanged next year at $417,000.
The limit is the legislatively set ceiling on the size of loans that can be purchased or guaranteed by Fannie Mae and Freddie Mac, the two government-sponsored financial institutions that keep local lenders awash in cash for home loans.
Because the enterprises bring a certain amount of standardization to the market, and because investors throughout the world believe the government-sponsored enterprises’ securities are backed by the full faith and credit of Uncle Sam, rates charged on loans at or below the limit are often 0.25% to 0.5% less expensive than so-called jumbo loans above the ceiling.
[The official loan limit sizes for conventional mortgages in 2007 [SOSD]](http://www.signonsandiego.com/news/business/20061129-9999-1b29conform.html) are:
- $417,000 for mortgages on single-family properties
- $533,850 for mortgages on two-family properties
- $645,300 for three-family properties
- $801,950 for four-family properties
Its interesting that the decline of national median housing prices per OFHEO would have resulted in a $667 drop in the limit to $416,333, but OFHEO director James Lockhart said he would not order a lower limit next year “so as not to disrupt the end-of-year pipeline.
I don’t follow his reasoning, but nevertheless, I think its a good idea to keep investors from getting jittery, especial given the role the housing market plays into our economy, with the risk of recession rising for 2007.
[OFHEO ESTABLISHES PROCEDURES FOR 2007 CONFORMING LOAN LIMIT [OFHEO (pdf)]](http://www.ofheo.gov/media/pdf/PRConfLoan2007.pdf)
[2007 CONFORMING LOAN LIMIT TO REMAIN AT $417,000 [OFHEO (pdf)]](http://www.ofheo.gov/media/pdf/PRConfLoan07.pdf)
Tags: Jumbo Mortgage, Conforming Mortgage, Fannie Mae, GSE, OFHEO, Freddie Mac
The conforming loan limit is tied to the year-over-year change in October home prices, and OFHEO made a big deal of announcing BEFORE the numbers came out that it would not lower the limit. If there had been a big decline in prices and a corresponding reduction in the conforming loan limit, that could have been disruptive. Suddenly some people who thought they had conforming loans would have been looking at jumbos. As it happened, prices were only down .16 percent so it wasn’t as big a deal to hold the line on the conforming loan limit as it might have been.
And you’ve still got folks like the California Association of Realtors grumbling that the limit should be going UP, at least in high cost areas like California where the median home price of $548,680 puts most people into a jumbo loan.
Matt, – excellent points. I thought the announcement was kind of strange foretelling a drop in the price index. I think that the conforming limit on a national basis is pretty dated and wonder if CAR isn’t on to something. I wonder if the conforming loan limit formula wouldn’t be better utilized if it were placed on a state by state basis – say phased in over a period of 10 years so that the east and west coasts aren’t penalized for having higher housing prices, or will that simply exagerate the differences by making borrowing costs lower there? An interesting dilemma.
“I think its a good idea to keep investors from getting jittery, especial given the role the housing market plays into our economy, with the risk of recession rising for 2007.”
not sure why maintaining a massive moral hazard in the mortgage market is a good idea. if Fannie weren’t there to back these loans up, does anyone think we would have the lending mess we know have on our hands?
these GSEs have outlived their usefulness