Last Tuesday the Office of Federal Housing Enterprise Oversight (OFHEO) announced that the 2005 single-family GSE conforming loan limit would rise roughly $26,000 to $359,650 from $333,700 - a 7.8% increase. By contrast, last year's rise was only about $10,000, resulting in significantly less homes being recategorized as conforming compared to previous years. This is also the first time that the OFHEO set the limit.
The conforming limits are indexed to the October-to-October percentage rise in the Federal Housing Finance Board purchase loan index. In 2003, the FHFB revised its computation method causing an artificially high home price index as well as a higher conforming limit. Last February, the OFHEO said that 2004 limit adopted by Fannie Mae and Freddie Mac did not incorporate the necessary adjustment factor resulting from the board's methodological changes. Because of this, the 2004 conforming limit was set at $333,700, $2,300 higher than it should have been. Due to the adjustment, the FHFB percent change was adopted for the 2005 calculation, not to the current limit but to a starting point of $331,400.
JPMorgan Securities said that the rise in the limit would probably lead to a rise in cash-out refinance activity. The current increase, analysts said, is more than double last year's rise, noting that conventional loan limits have risen by 20% since 2002, adding that the new limit suggests that half of the California market will now qualify for conventional loans.
"This is a modest negative for the agency market, leading to an increase in first quarter supply," note JPMorgan analysts. "It may have a greater impact on the agency ARM market than on the fixed-rate product." Merrill Lynch analysts added that this move in agency limits would probably raise agency supply slightly, while making TBA mortgages more negatively convex going forward.
In terms of prepayment speeds, UBS said that the current rise in loan limits should impact roughly 8% of the Jumbo loans, and about 12% of nonconforming Alt-A loans. Therefore, analysts report that these higher limits might cause a transaction that has evenly distributed loan balances to speed up by approximately less than 1% CPR, noting that in the next several months, pools with a heavy percentage of near-conforming loans are expected to prepay faster.
Meanwhile, Freddie Mac said that the recent rise makes it possible for about 340,000 more families to get lower cost mortgage financing, estimating that total mortgage interest savings for a typical 30-year fixed-rate borrower is as much as $24,800 over the life of the loan. On the other hand, Fannie Mae said that because of the new limits, the GSE estimates that as much as 271,524 borrowers would be eligible for a conforming loan in 2005.
The OFHEO also set the limits for 2005 multiunit loans. Two family loans will have a $460,400 cap (from $427,150), three-family loans will reach $556,500 (from $516,300), while four-family loans are now $691,600 (from $641,650). Meanwhile, the 2005 limit for second mortgages is pegged at $179,825.
The maximum amounts in Alaska, Hawaii, the U.S. Virgin Islands and Guam are 50% higher than the rest of the U.S.
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