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Fed: Conforming loan limit drop effect to be minimal

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Only 1.3% of purchase mortgages eligible for government backing in 2010 would have been left out under the new conforming loan limits set for Oct. 1, according a Federal Reserve study of Home Mortgage Disclosure Act data released Thursday. Congress elevated the conforming loan limits in 2008 to allow the Federal Housing Administration, Fannie Mae, and Freddie Mac to insure and guarantee more mortgages when the credit markets froze. Barring a last-minute measure by Congress, the limits expire Oct. 1, though key lawmakers said they will have another chance later in the year to restore the limits to their higher levels. In the most expensive neighborhoods, the loan limits will drop to $625,500 from $729,750. In each area, the caps will drop to 115% of the area's median home price, down from 125%. Many industry trade groups lobbied Congress to extend the limits and help aid a still struggling housing market toward recovery. According to a separate study done by the National Association of Homebuilders, the drop could affect as many as 17 million properties. According to the Department of Housing and Urban Development, 669 counties in the country will face changes to the FHFA limits. The Federal Housing Finance Agency said 250 counties will affected by the change in GSE limits. Both the FHA and GSE limits will fall differently in each county and in some cases to different levels. Loan sizes eligible in 2010 that would have been ineligible under the new limits belonged disproportionately to Asian borrowerss who used independent mortgage banks. More than half of these borrowers lived in the Sand States (Florida, Arizona, California, Nevada), while none lived in the Rust Belt states (Ohio, Michigan, Wisconsin, Illinois, Indiana), according to the study. According to Fed researchers, an additional 2.1% of 2010 purchase mortgages would have been affected by the changes in areas where the FHA limit fell more than the GSEs. "Borrowers affected by FHA limit changes but with loan sizes under the GSE limits would appear to be likely to have the GSEs as a viable option if the changes are implemented (although lending standards for FHA loans differ from those for loans eligible for purchase by the GSEs in ways other than just loan size)," according to the Fed study. In 2010, 35% of purchase mortgages and more than 58% of refinances were in areas where the FHA limit dropped but the GSE limit didn't. Fed researchers admitted it was more difficult to determine what options would be available for borrowers no longer eligible for either FHA or GSE programs. The share of mortgages across the country that would have been affected by the conforming loan limit drop was higher in 2010 than in 2008 or 2009 but about the same as the share in 2006 or 2007. Researchers said factors other than loan limits must have affected the amount of lending taking place in these years. But if the loans affected by the loan limit drops had been forced into the jumbo market in 2010, that market would have grown by 50%. Lenders in the 250 affected counties would have seen their portfolios grow by more than 20%. "These numbers are substantial and suggest that at least some of these loans would not have been originated or would have been originated only at higher prices," the Fed researchers said. Write to Jon Prior. Follow him on Twitter @JonAPrior

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