According to a new report from the Economics and Housing Policy Group at the National Association of Home Builders (NAHB), a drop in some mortgage loan limits for the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac and the Federal Housing Administration (FHA) scheduled to occur on Oct. 1 will reduce housing demand and place downward pressure on home prices in major housing markets.
According to the study, "GSE and FHA Loan Limit Changes for 2011: Scope of Impact," when homes come up for sale, the homes that will become ineligible to be purchased and securitized by the GSEs or to be purchased with FHA-insured financing as a result of the lower limits "would likely require financing with higher mortgage interest rates and other less favorable loan terms, such as higher required downpayments and more stringent credit history thresholds."
"The lower limits will place a constraint on home buying in high-cost housing markets, such as those along the coasts and in California. It is the last thing we need in a housing market that is still struggling to get back on its feet," said National Association of Home Builders (NAHB) Chairman Bob Nielsen, a home builder from Reno, Nev.
The downward pressure on prices could extend beyond the homes directly affected by the lower limits, the study warns, because first-time and trade-up home sales are interrelated. The size of conforming mortgages for the GSEs is currently limited to $417,000 in general, but that ceiling can rise to as high as $729,750 using a statutory formula based on local median home prices. Unless Congress acts to extend these levels, they will revert to the lower permanent criteria for high-cost areas under the Housing and Economic Recovery Act of 2008 (HERA).
The base limit will remain at $417,000, but the formula for establishing limits for high-cost areas will change from 125 percent to 115 percent of the area median home price, and the national ceiling will drop from $729,750 to $625,500. Purchasing homes that go above the GSE ceiling will require non-conforming loans that currently have been about 60 basis points (0.6 percentage points) higher than conforming loans, the study finds, and based on a report by the Federal Housing Finance Agency (FHFA) the non-conforming mortgages are expected to be 50-75 basis points higher.
Looking at limits published by the FHFA, 204 counties—or 6.5 percent of the 3,143 counties in the U.S.—will see a decrease in their high-cost conforming loan limit. These counties represent relatively dense concentrations of population and housing and contain 20.7 million owner-occupied units out of the 75.3 million nationwide, or 27 percent.
In the counties facing a decline, the average decline in the loan limit will be $67,018, down 11 percent from current levels. Under present law, 3.63 million owner-occupied homes are priced above the conforming loan limits. Under the changes set to take place on Oct. 1, an additional 1.38 million owner-occupied homes will be above the limit, leaving a total of 5 million homes that will not be eligible for GSE funding.
Lowering the limits will take an even bigger toll on homes eligible for FHA-insured financing, the study finds. As with the GSEs, the national ceiling for FHA loans will drop to $625,500 on Oct. 1, and for counties whose housing is priced somewhere between that amount and the lowest ceiling of $271,050, the FHA mortgage loan limit will also decline from 125 percent to 115 percent of the area median.
According to the limits published by the FHA, 620 counties—or 20 percent of the total—will see a decrease in their FHA loan level. The affected counties contain 44.3 million owner-occupied housing units, or 59 percent of the owner-occupied housing stock in the U.S. For counties facing a decline, the average drop in the FHA loan limit is $58,060, down 14 percent from current levels.
Under present law, 8.32 million owner-occupied homes are priced above the existing FHA loan limits. Under the changes set to take place on Oct. 1, an additional 3.87 million owner-occupied homes will surpass the limit, bringing the total number of homes ineligible for FHA-insured mortgages to 12.2 million.
