As published in Scotsman Guide's Residential Edition, February 2012.
Conforming-loan limits have been enthusiastically debated in the past few months. Since the housing crisis began, legislation aimed at keeping mortgage credit available has increased the maximum loan amount for government-backed loans to as much as $729,750 in high-cost markets. After lowering Fannie Mae and Freddie Mac conforming-loan limits in 250 counties, as well as Federal Housing Administration (FHA) loan limits in 669 counties, Congress moved to restore the FHA loan limits two weeks after they changed this past Oct. 1.
Why are these limits so important? Loans that fall within these limits have cheaper interest rates. But how much impact are the new Fannie and Freddie limits having and how much impact would the lower FHA limits have had on consumers?
Critics have argued that the housing market will be affected significantly and negatively by the lower limits of Fannie and Freddie because many consumers may be forced into a lower-priced home to stay within conforming-loan limits. Zillow found that only 0.75 percent of homes in the continental U.S., or 2.5 percent of homes in continental high-cost counties, are potentially affected by this change, however.
Zillow covers 168 of the 250 counties in the continental U.S. that are subject to lower limits. We found that, although limits fell by 10.2 percent on average in these counties, home values fell by 23.9 percent from January 2008, when these higher limits were established initially, to October 2011. On average, buyers are getting more home for their money despite lower limits. Of the 168 counties that Zillow covers, 20 counties had limits drop by a larger percentage than home values, however. The majority of these counties are located in Massachusetts, New York and Virginia.
Let’s consider the actual rates that homebuyers are getting for properties that are more than the new limits but less than the old ones. We looked at the rates these newly minted jumbo-loan applicants were quoted for primary-residence purchases with a 30-year fixed mortgage and a downpayment ranging from 15 percent to 25 percent. We then compared those quotes to the average rates received by applicants with loans that met the expanded conforming limits (see graph above). There was only a difference of 52 basis points. That equates to around $215 dollars a month on a $700,000 purchase.
For FHA loans, Zillow covers 389 of the 669 counties that had limits decrease on Oct. 1, but have since been increased again. On average, their limits fell 14.4 percent, although home values fell by 23.5 percent from January 2008 to October 2011. Of those 389 counties, 88 had their limits decline more than their home values declined. The majority of these counties are located in Colorado, Connecticut, Massachusetts, New York, New Jersey, Virginia, Pennsylvania, North Carolina and Washington.
Although more buyers would be affected by lower FHA limits, the impact still would be relatively small, because the limits dropped by a lower percentage than home values in most counties. For Fannie and Freddie conforming-loan limits, however, it’s evident that the overall impact is limited because relatively few homes nationwide will be affected, and the few affected borrowers still will have access to mortgage credit, just at somewhat higher rates.
Because these lower limits are not an issue for the overall health of the real estate market and were always intended to be temporary (but have been repeatedly extended), it becomes difficult to see the public-policy benefits of subsidizing rates for mortgages as expensive as $729,750.
Svenja Maarit Gudell joined Zillow’s industry-leading economics and analytics group in 2011. She produces real estate data and performs econometric analysis, including foreclosure and negative equity research, on more than 150 markets.
Gudell received her Ph.D. in finance from the University of Rochester. She previously worked for Analysis Group in Boston and the Federal Reserve Bank of New York as an assistant economist in the International Research Group. Contact Zillow at (206) 757-2701.