The Federal Housing Finance Agency (FHFA) is inviting public comments on a new proposal to "gradually reduce" loan limits for mortgages purchased by the two government sponsored enterprises (GSEs) Freddie Mac and Fannie Mae.   The proposal contemplates that the first reduction would take the maximum loan for a single-family mortgage in most areas of the country down to $400,000.  The press release from FHFA specifically states that the reduction applies to loans eligible for GSE purchase (i.e. NOT "conforming loan limit").  It does not mention loans which the GSEs may guarantee.

The reduction from the current limit of $417,000 is approximately 4 percent.  FHFA said it will apply the same reduction to current limits for what are considered "high costs" areas of the country where limits now range up to $625,500.  Under a 4 percent decrease the maximum upper limit in areas such as metropolitan Washington, DC, the New York/New Jersey area, and parts of California would become $600,000.

(On December 7 FHA announced it would keep its lowest loan limit at its current level of $271,050 but would reduce limits in 650 local higher costs areas.  The highest FHA loan limit in the continental U.S. will drop from $729,750 to $625,500 on January 1.) 

FHFA says that downsizing loan purchase limits is in line with the its goal to reduce the GSEs' market presence and complies with President Obama's August 2013 request that lower loan limits be implemented in an effort to encourage the return of private capital into the mortgage markets.  The proposed reductions would modestly reduce Fannie Mae's and Freddie Mac's business at the high end of the market, encourage more private funds, and limit taxpayer exposure to losses.

FHFA says the contemplated action is a plan and not a final decision and the agency has concluded that inviting public input on potential operational and technical issues associated with the planned decrease in loan purchase limits would benefit any final decision. Input received will be carefully reviewed before FHFA decides whether and how to proceed with the planned approach to Freddie Mac's and Fannie Mae's loan purchase limits. No final decision on loan purchase limits will be made until the comments are reviewed and, in any event, the changes contemplated in this Request for Input will not affect loans originated before October 1, 2014.

FHFA is specifically inviting comments on whether six months' advance notice of the change is adequate, whether it is preferable for FHFA to announce a multi-year schedule of decreases, and to what date any future loan purchase limit reductions should be tied.

An analysis of the impact of planned reductions and questions that interested parties are invited to answer can be found here.  The deadline for public comment is March 20, 2014.