With year end approaching, the GSEs are due to announce their conforming loan limit for 2005. Analysts explained that the maximum change in the limit - which the GSEs have fully utilized thus far - is determined by the October year-over-year percentage variation in the average home transaction size as reported by the Federal Housing Finance Board (FHFB).

A recent report by Countrywide Securities said that September to September changes provide a fairly good idea of the year-over-year change. However, analysts said that the current data is somewhat distorted by the fact that FHFB's average decreased significantly ($253,900 to $237,900) from August to September 2003. This introduces some uncertainty as to how big the 2003 to 2004 change would be, noting that the average last month rose 3.4% to $243.800.

Countrywide added that this year, the FHFB monthly average has had a fairly steady growth. Analysts noted that the September to September change was 11.3%, which corresponds to the rise in the Freddie Mac Home Price Index. They said that the 11.3% year-over-year change is colored by the weakness in the September 2003 average, adding that if the October 2004 average remains unchanged from September 2004, the new average will have risen 8.6% from October 2003. This implies a limit in the $362,000 level.

Separately, Merrill Lynch noted in a recent report that what is more relevant than the 11.3% September to September change is the 11-month change from October 2003 to September 2004, which is 8.65%. Analysts said that if they annualize this number, an increase of roughly 9.5% is derived.

However, analysts noted that last February, the Office of Federal Housing Enterprise Oversight stated that for the 2004 limit, the GSEs failed to incorporate a necessary adjustment factor because of methodological changes in the FHFB's Monthly Interest Rate Survey. This improper calculation caused the 2004 conforming loan limit to reach $333,700, $2,300 higher than it should have been. The OFHEO said an adjustment downward would be applied to the 2005 calculation.

Merrill said this seems to indicate that the FHFB percentage change will be applied, not to the current limit of $333,700, but to a starting point of $331,400. If a 9.5% increase over the latter number is applied, a conforming balance of around $362,800 would be reached. But if a 9% rise is adopted instead, $361,200 would be reached. Thus, Merrill said that it is safe to assume that the agency limit should rise from around $333,700 to somewhere between $360,000 and $363,000 for 2005, which is a roughly $26,000 to $30,000 increase.

This year's loan limits rose by $11,000 (3.4% increase), while 2003 loan limits rose by $22,000 (7.3% increase). Analysts said that the expected move in agency limits slightly increase agency supply, while making TBA mortgages more negatively convex going forward.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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