The Office of Federal Housing Enterprise Oversight (OFHEO) on Wednesday released a proposed guideline for calculating the annual conforming loan limit for mortgages purchased by Fannie Mae and Freddie Mac. The guideline that OFHEO is proposing is as follows:
(1) They will continue to utilize the October MIRS survey data from the Federal Housing Finance Board (FHFB) (released in November) to calculate the conforming loan limit for the following year. FHFB will provide OFHEO with the confidential data prior to its public release. OFHEO will then calculate the percentage change in the average house price and make any adjustments needed to reflect FHFB technological changes. Immediately following the FHFB's release of the October MIRS, OFHEO will announce the limits for the following year. At that point, the GSEs can decide whether to set their limits at or below the level.
(2) In the event of years when home price levels decline, OFHEO is proposing the following: a deference of the impact for one full year. If the price level increases the following year, then the prior year's decline will be subtracted from the increase. However, in the event that this results in a decrease of less than 1%, the decrease would be carried over to the next year.
(3) OFHEO points that all loans that were conforming at origination, would continue to be deemed within the conforming loan limit for the loans' remaining lives, even if the loan limit for any subsequent year is lower.
(4) Finally, regarding any adjustments or technological changes that the FHFB makes in regards to the MIRS, OFHEO or the GSEs may provide comments to the FHFB. After consideration from the FHFB, OFHEO would make adjustments to the next year's conforming loan limits based upon the proposed guidelines.
The regulator is taking public comments on these proposed guidelines through July 19.
Prior to 2004, the GSEs determined the conforming loan limit; however, OFHEO took over this responsibility at that point in part because of the agencies' inconsistent application of procedures for determining the amount. For example, the GSEs' failure to take into account the home price declines in the mid-1990s. For example, in 1994 and 1995, the single-family loan limit held unchanged from 1993's limit, despite home price declines in 1993 and 1994. Then in the calculation for the 1998 conforming loan limit, the GSEs increased it just 3.67% from 1997's level, despite HPA of 8.44%. This was apparently to retroactively adjust for the negative home price growth not factored in for 1994 and 1995 limits.
Also contributing to OFHEO's takeover of this calculation was the GSEs' failure to take into account an adjustment of the conforming loan limit suggested by FHFB in late 2003. In this instance, the FHFB communicated a change in the methodology for estimating home prices. This change indicated that the YOY home price growth was 2.71% and not 3.41% that the GSEs had determined.
Because of a lack of clarity regarding conforming loan limits, particularly regarding negative HPA, OFHEO said in a press release dated last Nov. 15 that if the October 2005 to October 2006 increase was negative, (which it was slightly at $306,258 versus $306,759 in October 2005), its effect on the maximum conforming limits would be deferred for one-year. Further, said OFHEO, the decrease would be netted against any increase next year for determination of the 2008 limits. If there was another decrease next year, then the maximum loan limit would decline in 2008 by at least this year's percentage decline in average prices.
OFHEO Director James Lockhart said at the time that they wanted to ensure an orderly and transparent process if a downward adjustment in the limits was required. "We want to make sure that guidance exists to avoid disrupting the end-of-year pipeline of mortgages or the market for mortgage-backed securities."
