Special Studies, June 1, 2011
By Robert Dietz, Ph.D., and Natalia Siniavskaia, Ph.D.
Economics and Housing Policy Group
National Association of Home Builders
Report available to the public as a courtesy of HousingEconomics.com
On October 1, 2011, some mortgage loan limits for the government-sponsored enterprises Fannie Mae and Freddie Mac (GSEs) and the Federal Housing Administration (FHA) will drop from their current temporary levels to reduced limits based on permanent criteria established by Congress in 2008.
This paper presents estimates of the number of homes in the affected counties that become ineligible for GSE and FHA mortgages given reasonable estimates of their market value and assumed levels of buyer downpayments. Affected homes, if they were to be placed onto the for-sale market, 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. This would reduce housing demand and place downward pressure on prices. As home sales are inter-related (for example, starter homes are sold to first-time homebuyers by move-up buyers), this pressure on prices could spill over on other homes in the affected areas.
NAHB’s analysis found that the scheduled declines in GSE loan limits will affect 204 counties, containing 1.38 million owner-occupied homes in the affected price ranges. Adding this number to the homes that are currently outside the temporary mortgage loan limits produces an estimated total of 5 million homes that will not be eligible for GSE funding if they were put on the for-sale market.
The effects for the scheduled declines in the FHA limits are more expansive. These declines will affect 620 counties, adding 3.87 million homes to those outside the temporary loan limits, for a total of 12.2 million homes ineligible for FHA-insured mortgages.
With respect to Fannie Mae and Freddie Mac, the mortgage loan limit, which defines the size of “conforming” mortgages that can be purchased and securitized by the GSEs, is currently in general $417,000. However, in high-cost areas, where a statutory formula based on local median home prices produces a level above the base limit, this limit can be as a high as the national ceiling of $729,750.
The present, temporary high-cost area limits for the GSEs were initially established by the Economic Stimulus Act of 2008 and have been extended annually since then. Unless Congress acts to again extend these levels, they will revert on October 1, 2011 to the lower permanent criteria for high-cost areas determined according to the Housing and Economic Recovery Act of 2008. The base limit will remain at $417,000, but the formula for establishing limits for high-cost areas will change from 125 to 115 percent of the area median home price and the national ceiling will drop from $729,750 to $625,500.
Given the scheduled lower loan limits, there is an expectation of additional non-conforming loans being originated. The spread between mortgage rates allocable to conforming loans and non-conforming loans is a reflection of both the interest rate cost of the mortgage not being available for securitization by the GSEs and underlying financial risk conditions. Today the spread is approximately 60 basis points (0.6 percentage points), although it has been higher, particularly during late 2008 at the peak of the credit crunch. A FHFA report on the scheduled increases for the GSE loan limits suggests that rates for affected homebuyers would be 50 to 75 basis points higher.
It is worth noting that loans falling outside the conforming loan limits would also likely be subject to higher downpayment requirements and tighter credit score requirements, further decreasing demand for such homes and placing downward pressure on prices.
According to the limits published by the Federal Housing Finance Agency (FHFA), 204 of 3143 counties in the United States (the 50 states and the District of Columbia), or 6.5% of the total, will see a decrease in the applicable high-cost conforming loan limit. Many, but not all, of the affected areas are concentrated along the coasts and other high cost areas.
However, examination of most recent (2009) data from the American Community Survey (ACS) shows that these counties also represent relatively dense concentrations of population and housing. In fact, the affected counties contain 20.7 million owner-occupied housing units of the 75.3 million nationwide or 27% of all owner-occupied housing in the U.S.
For counties facing a decline, the average decline in the loan limit is $67,018 or 11% from current levels.
To estimate the range of homes that will be directly affected by the change, we assume an average 10% downpayment. Using home value data from the ACS, we interpolate prices by county. With this approach, we estimate the following impacts concerning affected homes:
- Under present law, 3.63 million owner-occupied homes are priced above the conforming loan limits
- Under the changes set to take place on October 1, 2011, an additional 1.38 million owner-occupied homes will be put above the limit, bringing to 5 million the number of homes that will not be eligible for GSE funding.
Table 1 (PDF), presents the changes in the GSE mortgage loan limits and estimates of the size of the housing stock for each affected county.
Federal Housing Administration
As with the GSEs, on October 1, 2011, the loan limits for the FHA will also decline due to changes set in law. FHA loan limits are set slightly differently than those for Fannie Mae and Freddie Mac. By law, the lowest limit for any county for one-unit homes is $271,050. The ceiling for FHA currently cannot exceed $729,750, but that ceiling is set to decline on October 1, 2011 to $625,500.
For counties that lie between these limits, the mortgage loan limit is equal to the area median house price multiplied by 125% (currently) or 115% (as of October 1, 2011).
According to the limits published by the Federal Housing Administration, 620 of 3143 counties in the United States (the 50 states and the District of Columbia), or 20% of the total, will see a decrease in the applicable FHA loan limit. As with the GSE limits, many, but not all, of the affected areas are concentrated along the coasts and other high cost areas such as California. It is also worth noting that every county that will realize a decrease in its applicable GSE loan limits is also among the 620 counties that will face a decline in the FHA loan limit.
We again use the American Community Survey (ACS) to demonstrate that these counties include significant concentrations of population and housing, more than the share of the counties affected (one in five) would suggest. In fact, the affected counties contain 44.3 million owner-occupied housing units of the 75.3 million nationwide or 59% of all owner-occupied housing in the U.S.
For counties facing a decline, the average decline in the FHA loan limit is $58,060 or 14% from current levels.
Similar to the GSE scenario, to estimate the range of homes that will be affected by the change, we assume an average 3.5% downpayment (the minimum required under present law by the FHA). Using home value data from the ACS, we interpolate prices by county. With this approach, we estimate the following impacts concerning affected homes:
- 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 October 1, 2011, an additional 3.87 million owner-occupied homes will be put above the limit, bringing the total number of homes that are not eligible for FHA-insured mortgages to 12.2 million.
Table 2 (PDF), presents the changes in the FHA mortgage loan limits and estimates of the size of the housing stock for each affected county.
A Final Note on VA Mortgage Loan Limits
The loan limits for mortgages guaranteed by the Department of Veterans Affairs (VA) will not change again until January 1, 2012. Congress enacted temporary and permanent limit provisions for VA-guaranteed mortgages that generally track the limit provisions applicable to the GSEs but did so in legislation that was enacted separately from the bills governing the GSEs and FHA. The VA provisions included different effective dates. On January 1, 2012, VA high-cost county loan limits will experience declines similar to those that will occur on October 1, 2011 for the GSEs, although the new VA limits may be lower in some cases if VA continues to utilize more recent median home price data than FHFA and FHA. The effective base VA limit will continue to match the GSE limit of $417,000.
Download the Full Article
See other Special Studies
 Limits for mortgages guaranteed by the Department of Veterans Affairs (VA) will not change until January 1, 2012, as explained in the note at the end of this paper.
 See the FHFA Mortgage Market Note 11-01, “ Possible Declines in Conforming Loan Limits.” March 29, 2011 (updated May 2011). The report covers some of the analysis in this report, including an analysis of the share of loans that would be affected by the change.
 The FHFA reports 250 total counties (or county equivalent jurisdictions) are affected by the pending decrease in some county loan limits. Our analysis produces a smaller number of affected counties because it excludes U.S. territories and only analyzes the 50 states and the District of Columbia. Nonetheless, the effects for the U.S. territories will be significant. For example, as the FHFA notes, 41 of the 43 counties experiencing the largest high-cost area loan limit decreases are in Puerto Rico. We exclude those areas from our analysis to provide a consistent basis for calculating the average declines.
 Potential Changes to FHA Single-Family Loan Limits beginning October 1, 2011 from Implementation of the Housing and Economic Recovery Act of 2008. May 26, 2011. U.S. Department of Housing and Urban Development.
 The VA has adopted a policy of using the latest median home price data when calculating high-cost guarantee limits, which has resulted in year-to-year declines in some areas, while FHFA and FHA have followed a policy of not allowing declines in local median home prices to result in declines in the published high-cost area limits.