For the first time in three years, the upper limits on single family home mortgages in high-cost areas qualifying for Fannie Mae and Freddie Mac's government guarantee will decline at midnight tonight.
The loan limits, enacted on temporary basis effective July 2007, will drop from $729,750 to $625,500 tomorrow. The reduction in conforming loan limits also will reduce the size of loans that can qualify for Federal Housing Administration (FHA) guaranteed financing.
The limits are expiring despite a concerted effort by housing trade associations to extend it. The National Association of Home Builders has said it fears more than 17 million homes nationwide will become ineligible for more affordable federal funding when the loan limit expires. The National Association of Realtors said 5 to 10 percent of consumers will face higher mortgage rates as a result of the change.
"NAR is continuing to working closely with members of Congress and a coalition of industry partners to have the higher loan limits reinstated as soon as possible. Mortgage availability remains a real concern since the private market has yet to return; and while the housing market recovery is still soft, NAR firmly believes that lower loan limits will only further restrict liquidity in mortgage markets," said NAR Senior Vice President and Chief Economist Lawrence Yun. NAR mounted an unsuccessful lobbying campaign to enact Congressional legislation that would continue the higher limits.
The Federal Housing Finance Agency said only a relatively small number of borrowers in certain markets will be significantly affected, primarily larger-balance mortgages in California and a small number in other states. According to the FHFA data, roughly 6 out of 10 of loans originated with loan amounts above the permanent limits but meeting the temporary limits came from California. Massachusetts, New York, and New Jersey collectively accounted for a further 20 percent. Twenty-six U.S. states had no purchase by the GSEs of the higher-balance loans.
In 2008, Congress raised the limits up to $729,750 in some areas to make larger mortgages available in high-priced housing markets. The temporary limits were extended through a series of additional legislative actions to provide support to the mortgage market during the U.S. housing crisis. The most recent extension, for the federal 2011 fiscal year, which ends today, occurred last fall under a continuing resolution.
"Higher loan limits have been crucial to helping the housing market recover. Reverting to lower loan limits will impact 669 counties in 42 states and the District of Columbia, with an average loan limit reduction of more than $68,000. NAR estimates that 5 percent to 10 percent of consumers will face unnecessary higher mortgage rates as a result of this change, at a time when housing is still in recovery," said Yun today.
A June NAHB study found that if the limits are allowed to revert to 2008 levels, millions of homes would no longer be eligible for Fannie Mae, Freddie Mac and FHA funding and would have to be financed with mortgages requiring higher interest rates, fees and down payments and more stringent credit standards.
While the changes would affect only a minority of counties in the nation, those areas represent large concentrations of homes and population. The counties affected by the changes in the FHA limits contain nearly 60 percent of all owner-occupied homes; the counties affected by the Fannie-Freddie changes contain nearly 30 percent of all owner-occupied homes, said NAHB.
