OFHEO pulls a fast one on loan limits
Talk about moving the goalposts! The Office of Federal Housing Enterprise Oversight just released its plan for conforming loan limits should home prices fall, and the details have left me shaking my head in disbelief.
First, some background: Every year, OFHEO adjusts the conforming loan limit -- the maximum dollar size mortgage that Fannie Mae and Freddie Mac can buy or guarantee. It does so based on the October year-over-year change in average home prices. If the government finds that prices rose 5%, then the conforming loan limit goes up 5%. The 2006 limit was $417,000, for example, up 15.9% from a year earlier (the biggest increase since at least 1980).
Why does this matter? Rates on "conforming" loans are lower than rates on larger loans (called "jumbo mortgages"). That's because the presence of Fannie Mae and Freddie Mac allows lenders to offload risk to liquid, global capital markets more easily. Should the conforming loan limit go down in a given year, it would likely hurt the housing/mortgage market a bit at the margin.
Let's say the conforming limit fell to $400,000 from $417,000, a decline of 4.1%. In theory, the mortgages made next year for between $400,000 and $417,000 would carry higher rates than the mortgages made for those amounts this year (assuming rates overall were completely unchanged). That would reduce borrower buying power somewhat.
This is where it gets interesting ...
If October prices go UP, OFHEO says it'll be business as usual. The conforming limit will rise by that percentage amount. If October prices go down, OFHEO will just say "forget about the rules." It will defer any decrease for one year, leaving 2007 conforming loan limits unchanged from the $417,000 for 2006. Then the percentage decrease shown this October will be netted against any increase shown in the October 2007 figures. If prices fall AGAIN, then we'll finally see the decrease show up in 2008 mortgage limits.
Long story short -- rising prices and rising loan limits, which helped drive up home prices, are okay. We love inflation in our homes, right? But when prices actually fall, making homes generally more affordable to new buyers, the rules can be completely abandoned and/or re-written. What a country!
First, some background: Every year, OFHEO adjusts the conforming loan limit -- the maximum dollar size mortgage that Fannie Mae and Freddie Mac can buy or guarantee. It does so based on the October year-over-year change in average home prices. If the government finds that prices rose 5%, then the conforming loan limit goes up 5%. The 2006 limit was $417,000, for example, up 15.9% from a year earlier (the biggest increase since at least 1980).
Why does this matter? Rates on "conforming" loans are lower than rates on larger loans (called "jumbo mortgages"). That's because the presence of Fannie Mae and Freddie Mac allows lenders to offload risk to liquid, global capital markets more easily. Should the conforming loan limit go down in a given year, it would likely hurt the housing/mortgage market a bit at the margin.
Let's say the conforming limit fell to $400,000 from $417,000, a decline of 4.1%. In theory, the mortgages made next year for between $400,000 and $417,000 would carry higher rates than the mortgages made for those amounts this year (assuming rates overall were completely unchanged). That would reduce borrower buying power somewhat.
This is where it gets interesting ...
If October prices go UP, OFHEO says it'll be business as usual. The conforming limit will rise by that percentage amount. If October prices go down, OFHEO will just say "forget about the rules." It will defer any decrease for one year, leaving 2007 conforming loan limits unchanged from the $417,000 for 2006. Then the percentage decrease shown this October will be netted against any increase shown in the October 2007 figures. If prices fall AGAIN, then we'll finally see the decrease show up in 2008 mortgage limits.
Long story short -- rising prices and rising loan limits, which helped drive up home prices, are okay. We love inflation in our homes, right? But when prices actually fall, making homes generally more affordable to new buyers, the rules can be completely abandoned and/or re-written. What a country!
posted by Mike Larson at
4:21 PM
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