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Friday, April 01, 2011

FHFA: Where the Conforming Loan Limit Might Fall on October 1

by Calculated Risk on 4/01/2011 09:29:00 PM

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CR Note: The FHFA released two Mortgage Market Notes notes this week, one of the Qualified Residential Mortgage (QRM) standard and the other on the conforming loan limit.

Economist Tom Lawler discusses the conforming loan limit: FHFA: Where the Conforming Loan Limit Might Fall on October 1

Without legislative action, the conforming loan limit will revert back to those established under the Housing and Economic Recovery Act (HERA) of 2008. That act upped the conforming loan limit in many parts of the country, but the HERA hike was “trumped” by the Economic Stimulus Act (ESA) of 2008 and the Continuing Appropriations Act of 2011. The “formulas” that determined the conforming loan limits under the latter legislations, which were based on a % of an area’s 2007 median sales price, were liberally interpreted by regulators in that the median sales price for the county with the highest median sales in a metro area was used to derive the loan limit for the whole metro area, resulting in a loan limit that in many counties was two or more times that county’s median sales price.

According to a “Mortgage Market Note” published by FHFA this week, if loan limits were to revert back to the HERA limits, the loan limits would likely decline in only about 250 counties (or county-equivalents) -- and only 205 counties if you exclude Puerto Rico and Northern Mariana Islands. Moreover, in many of these counties the conforming loan limit would not fall by much – and in most areas the loan limits would be MASSIVELY above the most recent year’s median sales prices.

FHFA estimates that Fannie and Freddie combined acquired only about 50,000 mortgages originated in 2010 with loan balances in between the current loan limits and the HERA loan limits.

The county where the loan limits would fall the most is Monterey, California (from $729,750 to $483,000), followed by Monroe, Florida (from $729,750 to $529,000). Monroe County is at the southern tip of Florida, and includes the Florida Keys.

“Letting” the conforming loan limits go down on October 1st is not a big deal from the standpoint of the housing market, and the new limits would still leave the VAST bulk of home sales transactions eligible for GSE acquisition. However, it is a “big deal” in terms of it being the first (though very small) step to reduce the government’s/GSE’s “footprint” in the US mortgage market.

CR Note: This was from Tom Lawler