To reflect the increase in the price of homes across the country, Fannie Mae and Freddie Mac have increased their conventional loan limits for next year.

The limits for mortgages on a single-family home will increase to $252,700, effective Jan. 1, 2000. This is a 5.3% increase over the current single-family limit of $240,000. The limits of mortgages on two-, three- and four- family homes are also increasing the same amount. The limits in Alaska, Hawaii, Guam and the U.S. Virgin Islands will increase by an additional 50%.

Freddie Mac estimates that 150,000 more families will be eligible for the lower-cost mortgages, saving them $15,800 over the life of a 30-year mortgage. Fannie Mae reported that its loans would benefit 120,000 more families, saving them $16,100. The savings are determined from the spread between rates for a conventional mortgage and a jumbo mortgage, which stands at 25 basis points.

The increase is based on a formula stated in the government charter of the companies, said Freddie Mac's deputy chief economist, Frank Nothaft. "It's based on a measure of how much house prices have grown over the past year," he said, noting that rates have been increasing at an average of 5% to 5.5% nationally over the past year.

"The purpose of the indexing formula is to keep the conforming share of the market roughly constant over time," he added, saying that the jumbo share of the market has also increased at the same rate, not indicating shrinkage in those pools. "So the jumbo share of the market will be about what it was this past year, which is about what it was last year."

However, Nothaft did add that the house prices are increasing faster than inflation. "The underlying inflation rate in the economy is about 3% for consumer prices," he said. "So what this is showing is that housing prices are growing just a little more rapidly than the overall underlying rate of inflation in the economy," while still saying that the housing market is still strong.

The increase did garner support from the National Association of Realtors. "Raising the conforming loan limit to this level reflects the extraordinary strength of the housing industry," said NAR President Dennis R. Cronk, in a prepared statement. "Sales are brisk in the entry-level and trade-up sectors, and this change will help both first-time and repeat buyers, particularly those who are seeking to purchase homes in high-cost markets."

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