* Revised May 26, 2011. The revision corrects text on page 5 of the original release. A footnote has been inserted in this version where the correction has been made.
Conforming loan limits constrain the size of mortgages that Fannie Mae and Freddie Mac (the “Enterprises”) can purchase and securitize. Until early 2008, the loan limit was the same in all parts of the United States, except in Alaska, Hawaii, Guam and the U.S. Virgin Islands. In those locations, the limit was 50 percent higher. Since early 2008, a series of laws has established higher loan limits in localized areas where median home values are relatively high. A “baseline” loan limit—the loan limit that was in place prior to 2008—has remained in effect elsewhere.
In implementing the various laws enacted since 2008, FHFA and one of its predecessor agencies (OFHEO) have set loan limits consistent with the formulas that have been provided by Congress. For loans originated on or after October 1st of this year, barring Congressional action, there will be a change in the formula that determines local area loan limits in high-priced areas. As a result, conforming loan limits may decline in some of those areas.
Should loan limits decline, the geographic scope of the declines would be relatively limited. Only 250 county and county-equivalent areas—a small fraction of the more than three thousand counties in the country—would be affected. In more than 50 of the affected counties, the loan limit would fall by less than $25,000. The impact on the Enterprises would also be modest, as they generally purchase few mortgages whose balances are in the affected range. For example, the Enterprises collectively purchased only about 50,000 loans originated in 2010 where loan balances exceeded the limits that could take effect on October 1st of this year.
For the relatively small number of borrowers needing to finance loans in the affected range, the lower loan limits could result in higher mortgage rates. While it is difficult to predict, given recent trends, such borrowers could pay rates between ½ and ¾ of a percentage point higher than they would have had the current limits remained in place.
This Mortgage Market Note discusses the potential changes in the loan limits themselves. It provides detailed information on the location and magnitude of the possible loan limit declines. It also summarizes the underlying legislation that determines existing and future loan limits.