Friday, November 14, 2008

The effect of falling prices on the conforming loan limit

From The Wall Street Journal:
At least one thing is holding steady for 2009: the conforming home loan limit, or the maximum size of loans that [Fannie Mae and Freddie Mac] can purchase. The current limit of $417,000 for single-unit homes will remain in place for most of the U.S., the Federal Housing Finance Agency, the regulator of the two mortgage buyers, said today.

The Housing and Economic Recovery Act of 2008, signed into law in July in response to the subprime mortgage crisis, established that changes in home prices in a given year would determine the loan limit for the following one. The limits could not decline, so falling home prices produce no change. ...

“For this year…all reliable metrics point to lower prices, and a price decline of any size is sufficient to determine that the national limit will not change,” the agency said in a statement. ...

Homes in “high-cost” areas are subject to different guidelines, as set by the Housing and Economic Recovery Act. The loan limits for those areas are equal to 115 percent of average local prices, but they cannot exceed the standard limit of $625,000 for one-unit homes.

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