Proposal to Lower Conforming Loan Limits Draws Fire
A proposal by the Office of Federal Housing Enterprise Oversight (OFHEO) that could lower the conforming loan limit (CLL) as early as 2009 and would establish new guidance for calculating the annual limit so that it could be reduced in the future would have adverse consequences for the nation’s home buyers, according to NAHB.
Conforming loan limit calculations establish the maximum size limit for loans that Fannie Mae and Freddie Mac are allowed to purchase and they are also used to set limits for FHA and VA loans.
The loan limit is currently $417,000. The average home purchase price on which the calculation is based declined by 0.16% last year, and under the OFHEO proposal if the price continues to decline this year and in 2008 and the cumulative decline is more than 1%, then the limit for 2009 would be adjusted downward by that amount.
However, “the proposal does not appear to be authorized under current law, which only permits increases in the loan limit,” NAHB, the Mortgage Bankers Association and the National Association of Realtors® wrote in a joint letter to House Financial Services Committee Chairman Barney Frank (D-Mass.) and Sens. Chris Dodd (D-Conn.) and Richard Shelby (R-Ala.), chairman and ranking member of the Senate Committee on Banking, Housing and Urban Affairs. The law specifies that the annual adjustment to the limit each November for the following calendar year is made by “adding” to the amount, not subtracting from it.
In addition, the three groups noted that the proposed change would be bad public policy.
“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.”
OFHEO’s general counsel sought public comments on the proposal through July 19.
In NAHB’s response, David Crowe, the association’s senior staff vice president for regulatory and housing policy, noted that the conforming loan limit remained unchanged in 1993 and 1994, years in which the home price index registered declines, because “the current law does not require a decline in the limit when the price index declines.” These declines were subsequently netted out of future increases in the limit.
Authority to increase or decrease the conforming loan limit is included in H.R. 1427, The Federal Housing Finance Reform Act of 2007, and NAHB opposes that provision, Crowe said. “Pending enactment of this authority, NAHB maintains that the loan limit can only be increased, but not decreased, under current statutory authority,” he said.
“The possibility of a reduction in the CLL would create market uncertainty and significant negative repercussions for consumers, builders and lenders,” Crowe wrote. “Housing consumers would be impacted by higher financing costs for non-conforming loans. Builders and lenders would face operational disruptions.”
For example, Crowe said, many home buyers typically arrange for financing that does not exceed the conforming loan limit in order to avoid the higher financing costs for non-conforming loans, which can be 25 basis points or higher.
If the conforming loan limit were to decline one percentage point from the present level of $417,000 to $412,800, he said, “borrowers seeking to close on a new $417,000 loan or trying to refinance an existing $417,000 loan would have to either come up with an additional $4,200 in downpayment to keep the loan at the conforming limit, or pay approximately 25 basis points more for a non-conforming mortgage since their loan amount is now above the new CLL.”
If that mortgage increased from 6.25% to 6.50% because it was non-conforming, the monthly payment would increase by about $70, or $840 a year, and the borrower would pay an additional $24,500 in interest payments over the term of a 30-year fixed-rate loan, he said.
“NAHB estimates that approximately 430,000 households would be priced out of the market, meaning that they would not be able to qualify for the higher-priced non-conforming financing and may have to postpone a new home purchase or purchase a lower-priced home,” Crowe said.
For more information, e-mail Michelle Hamecs at NAHB, or call her at 800-368-5242 x8425.
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NAHB Kit Gives Builders Back-to-Basics Tips in Cooling Market
With the current cooling of the nation’s housing market expected to persist into next year, NAHB has developed a comprehensive online toolkit geared to providing association members with information that will help them prosper in today’s changing business environment.
To access the “Back to Basics” toolkit, you must be an NAHB member and have a login to www.nahb.org. To create a login, go to www.nahb.org/login or click on the log-in button on the main menu bar.
For assistance, call the NAHB Member Service Center at 800-368-5242.