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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 Oct. 1 will reduce housing demand and place downward pressure on home prices in major housing markets of the country, according to a new study from NAHB's Economics and Housing Policy Group.
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, if they are being sold, “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 authors of the report, NAHB economists Robert Dietz and Natalia Siniavskaia.
This downward pressure could extend beyond the homes directly affected by the lower limits, the study warns, because home sales are interrelated; for example, starter homes are sold to first-time home buyers by buyers who are moving up to more expensive homes.
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% to 115% 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 the non-conforming mortgages are expected to be 50 to 75 basis points higher.
“It is worth noting that loans falling outside the conforming loan limits would also likely be subject to higher downpayment requirements and tighter credit score requirements,” the study says, “further decreasing demand for such homes and placing downward pressure on prices.”
Looking at limits published by the FHFA, 204 counties — or 6.5% of the 3,143 counties in the U.S. — will see a decrease in their high-cost conforming loan limit.
However, examining the most recent data (for 2009) from the American Community Survey (ACS), the NAHB economists found that “these counties also represent relatively dense concentrations of population and housing” and contain 20.7 million owner-occupied units out of the 75.3 million nationwide, or 27%.
In the counties facing a decline, the average decline in the loan limit will be $67,018, down 11% from current levels.
To estimate the range of homes that will be directly affected by the change, the NAHB research assumed an average downpayment of 10%.
Using ACS data on home values to interpolate prices by county, the study estimates that:
- Under present law, 3.63 million owner-occupied homes are priced above the conforming loan limits.
- Under the changes set to take place on Oct. 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.
Lowering the limits will take an even bigger toll on homes eligible for FHA-insured financing, the study finds.
Set slightly differently than Fannie Mae and Freddie Mac ceilings, the lowest FHA limit for any county is currently $271,050 and the limit cannot exceed $729,750 nationwide.
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 in between the nation’s least and most expensive markets, the mortgage loan limit will equal 115% of the area median, down from 125% currently.
According to the limits published by the FHA, 620 counties — or 20% of the total — will see a decrease in their FHA loan level.
Again using ACS data, the study finds that the affected counties contain 44.3 million owner-occupied housing units, or 59% of the owner-occupied housing stock in the U.S.
For counties facing a decline, the average drop in the FHA loan limit is $58,060, down 14% from current levels.
Assuming an average 3.5% downpayment, which is the current minimum for FHA loans, and again using ACS home value data, the study estimates:
- 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 Oct. 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.
The report notes that today’s temporary high-cost area limits for the GSEs were initially established by the Economic Stimulus Act of 2008 and have been extended annually since then.
Congress does have the ability to extend the higher limits again this year
In an effort to keep FHA, Fannie Mae and Freddie Mac loan limits at their current levels, NAHB is calling on Congress to support H.R. 1754, the Preserving Equal Access to Mortgage Finance Programs Act, a bipartisan measure sponsored by Reps. Gary Miller (R-Calif.) and Brad Sherman (D-Calif.).
Under separate legislation, the ceilings for mortgages guaranteed by the Department of Veterans Affairs will change on Jan. 1, 2012.
Included in the NAHB report are detailed tables showing existing and new loan limits for counties that will be affected by the changes to GSE conforming loan limits and FHA loan limits.
For the entire report, “GSE and FHA Loan Limit Changes for 2011: Scope of Impact,” click here.
To read a summary of the report on NAHB's Eye on Housing, click here.