Mortgage Orb - Patrick Barnard - 23 November 2016
Considering how much home prices have increased on average during the past several years, one could argue that it was high time that the Federal Housing Finance Agency (FHFA) raise the maximum conforming loan limits for mortgages bought by Fannie Mae and Freddie Mac.
And that’s exactly what the FHFA did just one day before Thanksgiving: On Wednesday, the agency announced that it was raising the maximum conforming loan limits for one-unit properties to $424,100, up from the current $417,000.
Taking effect in 2017, this increase will be the first in the baseline loan limit since 2006.
In higher-cost areas, where 115% of the local median home value exceeds the baseline loan limit, the loan limit will be capped at $636,150 (which is 150% of $424,100).
The FHFA notes that the Housing and Economic Recovery Act of 2008 sets the maximum loan limit as a function of the area median home value, while also setting a “ceiling” on that limit of 150% of the baseline loan limit.
In related news, the FHFA released its home price index report, which shows that U.S. home prices increased 1.5% on average compared with the second quarter and increased 6.1% compared with the third quarter of 2015.
The FHFA’s data similarly shows that home prices increased 0.6% on average from August to September.
“Our data indicate that the deceleration in home price growth that we observed in late spring proved to be short-lived,” says Andrew Leventis, supervisory economist for the FHFA, in a release. “While price growth in select markets has cooled somewhat, for the U.S. as a whole, the third quarter showed no evidence of a widespread slowdown.”
Although the index rose 6.1% from the third quarter of 2015, prices of other goods and services were nearly unchanged.
The inflation-adjusted price of homes rose approximately 6.0% over the last year.
States that saw the most home price appreciation in the third quarter compared with the third quarter of 2015 included Florida (10.7%), Oregon (10.4%), Washington (10.4%), Colorado (10.0%) and Utah (9.5%).
“The 2017 conforming loan-limit increase announced today was prompted by the fact that house prices have surpassed the pre-decline level established in the third quarter of 2007, according to the FHFA index,” comments Mark Fleming, chief economist for First American Mortgage Solutions, in a statement. “Nominally, the price recovery is officially complete, but in real purchasing-power-adjusted terms, home prices are still far below the pre-decline peak. The underlying story is consumer house-buying power is better than it has been in a generation.”
Earlier this month, Black Knight Financial Services released a report showing that raising loan limits now could help boost origination volumes – albeit slightly.
“Our analysis shows that there are approximately 17 times as many originations – roughly 100,000 in total over the past 12 months – right at the conforming limit compared to preceding dollar amount buckets and that originations drop off by about 70 percent immediately above the limit,” says Ben Graboske, executive vice president for Black Knight Data and Analytics, in the firm’s most recent Mortgage Monitor report. “In addition, the data shows that a [government-sponsored enterprise, or GSE] loan originated right at the conforming limit is nine times more likely to carry a second lien than one that is not. One example scenario shows that, with all else being equal, raising the conforming loan limit by $10,000 could result in a one percent increase in originations – approximately 40,000 new loans and $20 billion in new loan balances.”
Black Knight’s report shows that the average U.S. home value increased by $13,500 from last year, but low interest rates have kept the monthly principal and interest payment needed to purchase a median-priced home almost equal to one year ago.
Should interest rates increase, however, that will change. Homes will become less affordable, resulting in more second liens. That’s a good justification for raising loan limits, the firm argues in its report.
Black Knight’s research shows that GSE loans originated at the current conforming limits are nine times more likely to have a “piggyback” second lien.