Conforming Loan Limits and the Economic Stimulus Package

(NOTICE: This article was written in response to President Bush's 2008 stimulus package. I have written another article About President Obama's 2009 Help for Homeowners package. You might want to keep this window open, as how well I did on predicting this one should inform your opinion on how well I'm likely to do on predicting the effects of the current bill)

Sometime today, February 13, 2008, President Bush is scheduled to sign the Economic Stimulus Package into law. Maybe it's already happened by the time this publishes. I've made my opposition plain from the time it was first proposed, but it's going to be law effective today.

Ever since it was proposed, people have been going crazy with suppositions on what the increase in the conforming loan limit is going to mean. Except that Fannie Mae and Freddie Mac, who buy conforming A paper loans, are mostly private corporations. In fact, the limit of how big the loans they want to buy is what really determines a "conforming loan", as in "Conforming to the underwriting requirements imposed jointly by Fannie Mae and Freddie Mac." How big the loans they want to buy is really up to them, and it's only been a couple of months since they decided not to raise their conforming loan limit for 2008.

Here's some text excerpted from an e-mail I got February 12 from one of the biggest lenders in the business:

As you are likely aware, the House and Senate recently passed the Economic Stimulus Package, which includes increases to standard GSE (Fannie Mae and Freddie Mac) loan limits and Federal Housing Authority (FHA) loan limits.

It is likely that the bill will be signed into law by the President as early as tomorrow, Feb. 13. We would like to let you know what to expect from DELETED once the bill is officially signed into law. We will follow up with additional messaging as we learn more from the GSEs and FHA about timing and availability.

Several steps must occur before DELETED can accept applications with the higher loan amounts in the bill, including:

• First, the GSEs and FHA must assess their internal impacts to determine the delivery approach they will require of mortgage lenders and investors.

• Second, GSEs and FHA must communicate their requirements to mortgage lenders and investors.

• Third, DELETED will work to identify impacts and implement the changes as quickly as possible.

Due to these necessary steps, the higher loan limits offered by the GSEs and FHA as a result of this bill will not be immediately available to our clients (higher loan limits are available through our non-conforming product offerings). (emphasis mine)

High-level Details of the Stimulus Package

Details of the GSE/FHA requirements are not finalized; however, outlined below is some information regarding what is expected as a result of the new law:

Overall

• The increases are a temporary solution for some high-cost areas based on Metropolitan Statistical Areas (MSAs).

• The higher loan limits will not be immediately available. (emphasis mine)

• Changes related to FHA Modernization were not included in the Economic Stimulus Package.
GSE Loan Limits

• Loan limits may be as high as $729,750; however, $729,750 will not be the nationwide loan limit (emphasis mine).

Increases will be available in high-cost areas based on the median area sales prices and will follow the standard HUD mortgage limit calculation process.

• To determine high-cost areas, the calculation factor will increase to 125% of the area median sales price (emphasis mine).

• The increase applies to loans originated from July 1, 2007, through Dec. 31, 2008.

FHA

• Loan limits in high-cost areas may increase to as much as $729,750.

• To determine high-cost areas, the calculation factor will increase to 125% of the area median sales price.

• The increase applies to loans with a credit approval issued prior to Dec. 31, 2008.

Please watch for more detail in the near future as we learn more about timing and availability.

In short, it's temporary, and it's based upon the median sales price in your MSA. In order to hit the $729,750 limit, the median sales price in your Metropolitan Statistical Area has to be $583,800. San Diego just barely makes it, and the Bay area blows it away. Orange County makes it handily. LA just barely makes it. Honolulu is the only area outside California I see that makes it to the maximum. I don't see any others on the list that make it (Manhattan is only a small part of the New York MSA).

Furthermore, as the email said and I've been explaining to people for weeks, just because Congress raised the conforming loan limit doesn't mean Fannie and Freddie have to buy them. FHA yes - that's a federal agency. But Fannie and Freddie are mostly private corporations these days. They're certainly going to give weight to what Congress has indicated it wants them to do, but they're not going to completely ignore actuarial concerns, and the bigger the loan, the worse the consequences if it should default. I'd expect Fannie and Freddie to raise their limits, but until they say that their limits have been raised, all of the lenders have to keep the old conforming limit of $417,000.

Want more information, or hard information for your area? here is a .pdf of the most recent data available by MSA. 125% of those numbers is the maximum, and this should get pretty close. For hard numbers, we're going to have to wait for the FHA, Fannie, and Freddie to release them to us. They're the ones who have to apply the law, and tell us what they will and will not fund.

Caveat Emptor

UPDATE: (March 6th) FHA has now announced their new conforming loan limits. I expect Fannie and Freddie to follow as quickly as they can.