Dropping Loan Limits Could Impact Housing Market RecoveryJuly 12th, 2011 by DWM Magazine
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).
NAHB predicts that as the houses 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, it will be difficult for them to be purchased, as they “would likely require financing with higher mortgage interest rates and other less favorable loan terms, such as higher required downpayments 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,” says NAHB chair Bob Nielsen, a home builder from Reno, Nev. “It is the last thing we need in a housing market that is still struggling to get back on its feet.”
NAHB also predicts that the downward pressure on prices could extend beyond the homes directly affected by the lower limits, because first-time and trade-up home sales often are interrelated.
The size of “conforming” mortgages for the GSEs currently is limited to $417,000 in general, but that number can rise to as high as $729,750 using a statutory formula based on local median home prices. NAHB officials say that these levels need to be extended, 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.
Under present law, 3.63 million owner-occupied homes are priced above the conforming loan limits. Under the changes set to take place on October 1, an additional 1.38 million owner-occupied homes will be above the limit, leaving a total of 5 million homes that will not be eligible for GSE funding, according to NAHB.
The NAHB study further predicts that lowering the limits will take an even bigger toll on homes eligible for FHA-insured financing, the study finds. As with the GSEs, the national ceiling for FHA loans will drop to $625,500 on October 1, and for counties whose housing is priced somewhere between that amount and the lowest ceiling of $271,050, the FHA mortgage loan limit also will decline from 125 percent to 115 percent of the area median.
According to the limits published by the FHA, 620 counties—or 20 percent of the total—will see a decrease in their FHA loan levels. The affected counties contain 44.3 million owner-occupied housing units, or 59 percent of the owner-occupied housing stock in the United States.
For counties facing a decline, the average drop in the FHA loan limit is $58,060, down 14 percent from current levels.
Under present law, 8.32 million owner-occupied homes are priced above the existing FHA loan limits. Under the changes set to take place on October 1, an additional 3.87 million owner-occupied homes will surpass the limit, bringing the total number of homes ineligible for FHA-insured mortgages to 12.2 million, according to NAHB.