What Higher Conventional Loan Limits Might Mean

by Peter G. Miller
February 7th, 2008

Speaking before the Senate Banking, Housing and Urban Affairs Committee, James Lockhart, Director of the Office of Federal Housing Enterprise Oversight(OFHEO) explained in 20 detailed pages why raising conventional loan limits might adversely impact lending in general and the FHA mortgage program in particular. (OFHEO is the regulatory body that oversees Fannie Mae and Freddie Mac, so-called “government-sponsored enterprises” or GSEs).

Under current rules, the FHA loan limit is equal to 87 percent of the conventional loan limit. Since the conventional loan limit is $417,000 at this time it follows that the FHA loan limit in high-cost areas is $362,790 for a single-family home. There is also an FHA loan limit for low-cost areas that’s equal to 48 percent of the convention al loan limit for single-family homes, or $200,160. The conventional limits are 50 percent higher in Alaska, Hawaii, Guam, and the U.S. Virgin Islands.

So, if conventional loan limits are raised, what about FHA mortgages?

“Tying the new limits to FHA limits will likely result in a large number of different loan limits across the country, requiring additional operational challenges,” says Lockhart. “That could delay lender participation, especially for non-FHA lenders. Like the GSEs, they may have to reprogram and adjust their guidelines and agreements to account for a large number of different local loan limits.”

Lockhart’s real point is that he opposes raising the conventional loan limits. As he explains, “jumbo loans would present new risks to the already challenged GSEs. The prepayment and credit risks are different than those of conforming loans. The provision also pushes the GSEs to increase their geographic concentration in some of the riskiest real estate markets. Roughly half of all jumbos are in California. Underwriting them successfully will require new models and systems to ensure safe and sound implementation. Capital also would present challenges even if all newly conforming mortgages are securitized. A $600,000 loan requires as much capital as three $200,000 loans.”

Will Congress listen to Lockhart? In the race between prudence and political expediency, prudence rarely wins.

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