Loan Limit Tango Starts Anew - 11/3/2004 - Mortgage Loan Refinance Debt Equity

Loan Limit Tango Starts Anew
by Lew Sichelman

In an annual ritual that tends to start when the Federal Housing Finance Board issues its monthly mortgage market survey for September, it's time to guess next year's conforming loan limit.

The maximum, currently $333,700, is one of the most closely watched numbers in the mortgage and financial markets because it's the ceiling on the loans that can be purchased or securitized by Fannie Mae and Freddie Mac, the two government chartered financial institutions which provide liquidity to the U.S. mortgage market.

Loans at or below the so-called "conforming loan" limit (conforming because they adhere to Fannie and Freddie's guidelines) are anywhere from 0.25 to 0.75 percent less expensive than loans above because of several reasons, not the least of which is the perception on the part of investors in mortgages worldwide that Uncle Sam will step in should Fannie or Freddie falter. The ceiling is adjusted every year based on the average price of housing as calculated by the housing finance board from one October to the next.

The October 2004 figure won't be announced until Nov. 30, the housing finance board said late last month. That's several days later than usual.

But if the 11.3 percent increase in the average house price from September 2003 to September 2004 is any gauge, the ceiling will rise to $371,400 as of Jan. 1, 2005.

Of course, it's pure conjecture whether the October-to-October increase will be that large or even larger -- or whether there will be any increase at all. After all, the FHFB average has been on a roller coaster ride practically all year, rising in one month, dipping the next, rising again the following month and falling once more after that.

Actually, one thing is certain: Whatever the percentage increase, the dollar amount will be adjusted downward by $2,300 by the Office of Federal Housing Enterprise Oversight, the GSE's safety and soundness regulator.

That's the amount Fannie Mae and Freddie Mac neglected to incorporate into their annual calculation last year. And because of the error, OFHEO will be doing the math from now on, not the GSEs.

"It is now clear that the informal procedure currently used for annually adjusting the conforming loan limit is inadequate and a new, formal supervisory process is warranted," OFHEO Director Armando Falcon said last February.

Specifically, the GSEs determined that the 2004 ceiling would increase by 3.41 percent based on an unadjusted national average. Had they followed the FHFB staff's notice to reduce the October 2003 figure by $1,647, the change in prices would have been only 2.71 percent.

It wasn't the first time Fannie and Freddie's failed to make the proper loan limit adjustment, either.

On three occasions -- 1990, 1994 and 1995 -- the average house price declined from the previous October, yet the GSEs didn't lower their limit.

In three other years -- 1992, 1998 and 2003 -- they did not take methodology changes in the survey into account. And in 1997, they took yet another course, setting a lower number than called for by the adjustment.

Thus, in seven of the 23 years in which the enterprises were responsible for calculating the all-important loan limit, they failed to make the proper adjustments. And that rather abysmal batting average, Falcon said earlier this year, necessitates "a more regularized process."

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