Fannie Mae and Freddie Mac are prohibited by charter from purchasing singlefamily conventional mortgages with unpaid principal balances above the conforming loan limit. For mortgages that finance one-unit properties, that limit is $417,000 in 2008, as it was in 2006 and 2007. Higher limits apply to loans that finance properties with two to four units. The limits for properties of all sizes are 50 percent higher in Alaska, Hawaii, Guam, and the U.S. Virgin Islands. The limits are adjusted each year to reflect the change in the national average purchase price for all conventionally financed single-family homes, as measured by the Federal Housing Finance Board’s (FHFB’s) Monthly Interest Rate Survey (MIRS). Conventional single-family loans with original balances above the conforming loan limit are generally known as jumbo mortgages.
In May 2007 the House of Representatives passed H.R. 1427, the Federal Housing Enterprises Reform Act of 2007. That bill would increase the conforming loan limit in high-cost areas to the lower of (1) 150 percent of the national limit or (2) the median price in such area. The higher limits would not apply to loans held as assets by an Enterprise, but only to mortgages “on which are based securities issued and sold by the Enterprise involved,” unless the director of the new agency created by the bill found that the restriction would increase costs to mortgage borrowers in high-cost areas. Separate adjustments would be made to the limits for mortgages on properties in highcost areas (as defined geographically by the regulator) with one, two, three, and four units, based on estimates of median prices for properties of each size.
In September 2007 Senator Charles Schumer introduced S. 2036, the Protecting Access to Safe Mortgages Act. That bill would raise the conforming loan limit for all conventional single-family mortgages in high-cost areas, not just loans backing securities issued and sold by the Enterprise involved, but the increase would be only for the year following the date of enactment.
This analysis considers some of the implications of those proposals. The paper is organized as follows. Section II provides background information on the jumbo mortgage market. Section III discusses the potential localities that would be designated high-cost areas and the potential volume of loans that would be affected by the proposals. That analysis focuses only on the limits on loans that finance one-unit properties, which comprise 90 percent of the one- to four-unit housing stock in the U.S. Section IV examines the characteristics of mortgages that would become newly eligible for Enterprise purchase. Section V discusses the implications for the Enterprises of the proposals. Section VI presents arguments for and against raising the limit and discusses other policy issues raised by the proposals. The Appendix reviews how the conforming loan limit is set under current law, sources of data on the prices of single-family homes, and methodologies used to estimate median house prices.