The Office of Federal Housing Enterprise Oversight (OFHEO), the agency charged with keeping an eye on Freddie Mac and Fannie Mae has alerted lenders that conforming loan limits for the next year may be subject to falling rather than rising for the first time in years. These limits determine the maximum size of a mortgage that Freddie and Fannie can buy or guarantee.

Eligibility for a conforming as opposed to what is commonly called a jumbo loan can save a borrower a substantial amount of money over the life of a loan. While figures vary regionally, a conforming loan has, in the past, generally been priced in the vicinity of 25 basis points less than the jumbo variety.



The conforming loan limit for the current year is $417,000 for a single family home. When this limit was announced in December of 2005 it marked a 16 percent increase from the $357,650 limit that had been in force in 2005. The 2005 figure was, in turn, 8 percent higher than the limit for 2004.

OFHEO assumed responsibility for calculating the maximum loan limit in February, 2004 and its rules dictate that the agency use the October-to-October percentage increase in the average house price as reported in the Monthly Interest Rate Survey of the Federal Housing Finance board to compute the limits. However, there has been uncertainty about how the limits will be computed if the October average declines from the average in October, 2005 and that seems likely based on a 3.1 percent drop in the September figures. The October figures will be released next week but lenders are already making decisions regarding loans that may be affected by the new limits.

The news from OFHEO came in the form of an announcement from the Office of the Director, James B. Lockhart, about the procedures Fannie and Freddie are to follow should the October-to-October figures fall...

"If house prices fall, loan limits should reflect that, but we need to ensure an orderly and transparent process for any downward adjustment,” said Lockhart. "We want to make sure that guidance exists to avoid disrupting the end-of-the-year pipeline of mortgages or the market for mortgage-backed securities. Accordingly, OFHEO has decided to clarify now how any October-to-October price change would affect maximum loan limits."

The new rules are as follows: if the average October 2006 price exceeds that of October 2005, the maximum conforming limits will be adjusted upward by the percentage increase in price (as has been done in the past.) But, if there is a decrease the maximum 2007 loan limits will remain unchanged. Then this year's decrease would be netted against any increase next year in determining the 2008 limits. If a decrease in average price this year is followed by another decrease next year, the maximum loan limits will decline in 2008 by at least this year's percentage decrease in average prices.

We interpret this to mean that should the October-to-October prices decline 3 percent this year and then rise 2 percent in October 2007, the conforming limits for 2008 will decline 1 percent. Should the 2007 figures increase 6 percent, the limits would rise a net of 3 percent. No matter what, it appears that new limits to be announced in December can only go up or remain unchanged. In addition to the limits for single family homes, conforming two family loans are limited at $533,850 and three-families at $645,300.

OFHEO has promised to provide more detailed guidance after the first of the year for any such price decreases in 2008 and subsequent years. The office also stressed that any mortgages previously purchased or guaranteed will not be affected by any downward revisions in conforming loan limits.