Magazine article Mortgage Banking

Fannie/Freddie Loan Limits: Ups and Downs?

Magazine article Mortgage Banking

Fannie/Freddie Loan Limits: Ups and Downs?

Article excerpt

At the end of November, the Federal Housing Finance Board will issue its monthly report on the rates and terms on conventional mortgages. Lenders will be particularly interested in the national average single-family home price for the month of October because the Fannie Mae/Freddie Mac single-family maximum loan limits have been a function of the increase from the prior year of that national average. If this October's number is lower than last year's, an occurrence within the realm of possibility, the issue is whether the number will be applied to reduce the current maximum limits on loans purchased or securitized by Fannie Mae and Freddie Mac. Today, Fannie Mae and Freddie Mac may purchase or securitize single-family loans up to $203,150.

Although the statutes setting the maximum loan amounts for each enterprise speak only in terms of upward adjustments, some might argue that the enterprises should adjust their loan limits downward if the national average home sale price for October, in fact, has declined from last year's figure. Any such decision would be unfortunate and unwise for several reasons.

The controlling legislation does not expressly require downward adjustments, with both enterprises subject to the same rules. The statutory formula for adjusting the maximum loan limits, as applied to Fannie Mae, is set forth in Section 302(b) of the Federal National Mortgage Association Charter Act, which provides:

* The corporation shall establish limitations governing the maximum original principal obligation of conventional mortgages that are purchased by it... such maximum limitations shall be adjusted effective January 1 of each year beginning with 1981. Each such adjustment shall be made by adding to each such amount (as it may have been previously adjusted) a percentage thereof equal to the percentage increase during the 12-month period ending with the previous October in the national average one-family house price in the monthly survey of all major lenders conducted by the Federal Housing Finance Board.

The statute on its face contemplates only upward adjustments in the loan limits. The provision speaks in terms of "adding" to the previous year's limit and the "percentage increase" in the national average one-family house price. Based on the text of the statute, Congress, at most, seems to have given Fannie Mae and Freddie Mac discretion as to whether or not to adjust the loan limits downward. It also could be argued that the agencies simply are not authorized to lower the limits although the agencies' minor 1989 downward adjustment was never formally challenged.

Typically, the Federal Housing Finance Board (FHFB) obtains reports monthly from about 350 lenders on the rates and terms of conventional loans. Another 50 to 60 lenders each month report no loans closed. In weighting the responses, the FHFB imposes shares based on the HUD gross flows so that loans are attributed approximately as follows: mortgage bankers (50 percent), commercial banks (25 percent), savings and loans (22 percent) and mutual savings banks (3 percent).

As of November 1991, the survey procedure was amended to cover loans closed (i.e., entered on the books) by participants during the last five business days of the month. Prior to that time, the survey covered the first five business days of the month. "Loans closed" excludes refinance loans. The Mortgage Bankers Association of America recommended that the survey period be changed to reflect the fact that more loans close at the end of the month, and this recommendation was adopted. …

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