June 28, 2011 (Chris Moore)
A new study by the National Association of Home Builders (NAHB) finds that the drop in some mortgage loan limits scheduled to take effect on October 1, 2011, will reduce housing demand and place downward pressure on housing prices.
The study says the new lower loan limits will result in more homes being above the “conforming” loan limit thus making them ineligible to purchased by government-sponsored enterprises (GSE) Freddie Mac and Fannie Mae or to be purchased by FHA-insured financing.
Such a scenario would likely result in more buyers purchasing homes that would likely require higher down payments, financing with higher mortgage rates, more stringent credit requirements and other less favorable loan terms.
“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 NAHB Chairman Bob Nielsen.
Under the Housing and Economic Recovery Act of 2008, the base limit for a loan through either two of the GSEs was $417,000, but could rise as high as $729,750, based upon a formula that allowed loan limits to rise as high as 125 percent of local median prices.
The formula change taking effect in October would lower the formula to 115 percent and cap the loan amount at $625,000. FHA-insured loans would see a similar drop although their lowest limit would be $271,050.
The amount of homes that would be affected are staggering. According to the report an estimated 3.63 million owner-occupied homes are currently priced above the conforming loan limit. If the rule is allowed to take effect, an additional 1.38 million owner-occupied homes would be placed above the limit. That would leave a total of just over 5 million homes that would no longer be eligible for financing through either GSE.
FHA-insured loans fare worse. There are currently 8.32 million owner-occupied homes priced above FHA loan limits, if the new rule is allowed to take effect, an additional 3.87 million homes would no longer be eligible for FHA-insured financing, leaving 12.2 million homes ineligible for FHA insured financing.
The study warns that downward pressure would extend beyond the homes directly affected by the new lower limits because first-time homebuyers and trade-up home sales are interrelated.
Tags: NAHB, GSE, Freddie Mac, Fannie Mae, housing demand, housing prices, loan limits, conforming loans, higher down payments, higher mortgage rates, stringent credit requirements