FHFA Won’t Reduce Home Loan Limits, At Least Not Yet

• May 13, 2014

by Lark Turner

Mel Watt, the new head of the Federal Housing Finance Agency (FHFA), announced Tuesday that the agency is scrapping a plan to raise conforming home loan limits.

Watt made the announcement in a speech at the Brookings Institution, and said it was motivated by a desire to keep the housing market healthy.

“As market participants are already aware, FHFA released a proposal last year suggesting that the agency would use its conservatorship authority to lower the mortgage amounts eligible for guarantee by Fannie Mae or Freddie Mac. Many groups and individuals submitted feedback in response to the Request for Input, and FHFA has thoroughly reviewed and evaluated those responses,” Watt said. “I am announcing today that FHFA will not use its authority as conservator to reduce current loan limits. This decision is motivated by concerns about how such a reduction could adversely impact the health of the current housing finance market.”

Last year, the administration announced a plan to reduce the maximum size of home loans backed by Fannie Mae and Freddie Mac. Fannie and Freddie currently back loans of up to $417,000 in most areas of the country and up to $625,500 in more expensive housing markets, including D.C. Loans in high-cost markets had risen to $729,750 in early 2009 as part of an economic stimulus package, but dropped down to $625,500 in late 2011. Prior to being raised, the loans topped out at $417,000.

When a lender puts a borrower’s loan application through Fannie Mae and Freddie Mac’s automated underwriting system, and it is approved, the government assumes the risk of a borrower defaulting on a loan up to the maximum amount, not the lender. If and when loan limits drop, it could result in higher down payments and interest rates for borrowers, and dealing with more stringent underwriting guidelines from lenders. But the bigger concern for the federal government is what impact lowering limits would have on the economy. Right now, it’s clear they’ve decided it isn’t worth the risk.

This article originally published at http://dc.urbanturf.com/articles/blog/fhfa_wont_reduce_current_loan_limits_at_least_not_yet/8481