In early September, the Federal Housing Finance Agency (FHFA), the entity that oversees Freddie Mac and Fannie Mae, gave notice that it would revise the conforming loans limits in an attempt to stimulate the private sector, specifically the private mortgage securitization (PLS) market. Though any reduction in the loan limits is expected to be relatively modest, it could have more far reaching impacts at the local level and for the affected borrowers.
Each year, the FHFA adjusts the national conforming loan limit which defines the space within which Fannie Mae and Freddie Mac can finance mortgage. The national limit is $417,000, but that varies by county and can increase to $625,500 in high cost markets. The FHA’s limits, which range from $261,050 to $725,750, are based off of the conforming limit so the FHFA’s actions would impact FHA borrowers as well.
NAR Research estimates that if the national conforming limit were lowered to $400,000, roughly 145,000 total conforming mortgages and 49,000 conforming purchase mortgages would have been impacted in 2012 . If the FHA limits were also revised, the impact would be larger by roughly 15,000 and 7,000 borrowers, respectively. The total number was inflated due to the refinance boom in 2012. However, strong price growth in 2013 has likely pushed more home buyers toward the conforming limits. Most estimates have the impacted volume at roughly 2-5% nationally.
The October 1st decline in the conforming and FHA loan limits reduced the size of loans that the FHA as well as Fannie Mae and Freddie Mac can finance. This change was made in an attempt to stimulate the private sector and to reduce the government’s footprint in the mortgage market. However, concerns linger that the private sector is not yet able to absorb this portion of the market and that the higher rates and downpayment requirements of private financing relative to the FHA and GSEs have inhibited sales in the upper price ranges, hobbling the overall housing market.
- To attain a better understanding of the borrowers impacted by the reduction of the conforming loan limits in high cost areas, NAR Researched looked at FHA purchase originations data reported for the portion of 2011 prior to the change in the loan limits (e.g. January 1st through September 30th).
- Data from FHA’s Single Family Snapshot (loan amount, product type, and contract rate) were coupled with assumptions about the amortization period, debt-to-income ratio as well as insurance and taxes (30 years, 28%, and 1.5%, respectively) to estimate the household incomes of affected borrowers.
- The vast majority of borrowers, 84%, who used a loan above the new conforming limits prior to October 1st, had a household income below $150,000.
- To read the complete new “Impact of New Conforming Loan Limits” survey, click here >
- To better understand how the change in loan limits would impact local markets, NAR Research looked at FHA purchase loans originated between January 1, 2011 and September 30, 2011 (the last day prior to the new limits).
- Of the 10 counties with the largest number of FHA purchase loans originated above the new limits in the first nine months of 2011, nearly all of them were in markets with high delinquency rates.
- Nine out of ten of these markets had a 90-day delinquency rate above the national average 7.2% in August.
- Slower sales and/or a decline in prices could exacerbate this trend. Furthermore, the number of sales impacted by the new limits is likely much higher as these figures exclude GSE lending and loans held in the portfolio of private banks.