Fannie Mae's and Freddie Mac's conforming limits for next year are set to increase soon, and analysts are predicting agency limits to top $400,000 next year.

The computation of the new limits is based on the Federal Home Loan Board survey's average home price from October through October. Merrill Lynch analysts noted that as of August, the average price in the FHFB survey was $301,900, approximately 14% higher than last October's $264,540 figure. Barring a significant decline in the FHFB survey average in September and October, Merrill analysts estimate the 2005 conforming limit to be roughly $410,000.

With the spotlight currently focused on the GSEs, sources said that political pressure could be exerted on them to not increase limits to the maximum allowable threshold. "The GSEs have to consider the perception that they have become too powerful, and an over $400,000 conforming limit could become a political hot potato," one analyst said.

However, another school of thought argues the GSEs would set the limits as high as possible before legislation is passed that may control future balance limits.

The private label market has also been affected. With conforming limits increasingly invading jumbo territory, some originators are choosing to put some conforming production in private label pools rather than a Fannie Mae or Freddie Mac pool depending on where better execution is available.

In terms of relative value, Merrill Lynch analysts noted that a sizeable increase in agency loan limits should make specified loan balance pools trade even better next year and recommended owning the better convexity implied in low loan balance 5s.

(c) 2005 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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