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Will The Conforming Loan Limit Change in 2014?
**UPDATE**
As a follow up to this blog the FHFA decided to leave the conforming loan limit unchanged at $417,000 for 2014. It is expected that this will further to housing market recovery. Had the limit been decreased the sense was the recovery could have been reversed. This is very good news for home buyers especially in more expensive markets.
Traditionally something LOWER is thought to be BETTER. Especially in the lending world around interest rates. Not necessarily, however, when it comes to the conforming loan limit which currently sits at $417,000.
Each year, around Thanksgiving, the conforming loan limit is evaluated and considered for adjustment. Historically, this number has increased each year; the last seven years being the exception. This limit has not been adjusted from the $417,000 level since 2006. (Some areas designated as high cost take this limit up to $625,500.) The amount has been frozen at this number despite falling real estate values experienced from 2007 through 2011. The strategy behind this was that by keeping the threshold here, more people would buy homes using financing up to this amount. The housing market recovery was considered too fragile to lower this number.
Edward Demarco, acting Director of the Federal Housing Finance Agency (FHFA), announced on Thursday, October 24th that if loan limits are reduced in November they would not take effect for at least six months. Lenders are already going to be rolling out new regulatory changes on January 1, 2014 and it was suggested that this could produce issues in the industry to have an additional change.
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SIDEBAR Fannie Mae (FNMA) & Freddie Mac (FHLMC): Were both put into conservatorship of the FHFA in 2008. Along with FHA, loans made by Fannie and Freddie make up approximately 90% of the mortgage market. What is a conforming loan limit? This is the loan amount that the GSE’s (Government Sponsored Enterprise), Fannie Mae and Freddie Mac, set as the maximum loan amount they will invest in. How is the conforming loan limit arrived at? The Office of Federal Housing Enterprise Oversight (OFHEO) sets the criteria to be used by Fannie and Freddie. They look at housing data from the fiscal year, ending in October. The median prices drive the calculation for the maximum loan amount deemed acceptable to roll into their packaging and sale to the secondary market. |
Loan amounts which exceed this ‘conforming’ limit are referred to as ‘jumbo’ mortgages and are commonly made available by local and large national banks and investors. Jumbo loans customarily come with slightly higher interest rates and more stringent loan underwriting requirements.
There are a few ways this could go next month when Fannie and Freddie analyze this threshold:
- The limit will be left unchanged
- The limit will be lowered by some percentage
- The limit will be increased (unlikely)
- The limit will remain $417,000 in most areas of the country but certain high cost areas (such as parts of NY, NJ and CA that currently go up the to the $625,500 level) will see a reduction
Both the National Association of Realtors and the National Association of Home Builders are lobbying hard to prevent a decrease to this limit. The fear is that by lowering this conforming loan limit the housing market recovery we have experienced of late could become stalled.
For more information about the changing mortgage landscape, check out Meighan Dutt’s earlier post.