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Mortgage

GSEs to raise conforming loan limits in 2017?

HPI hits pre-crisis levels

In the second quarter of 2016, the Federal Housing Finance Agency’s house price index was almost identical to the level of the index in the third quarter of 2007, according to the Mortgage Bankers Association.

So why is this so important? Once the HPI reaches pre-crisis levels, Fannie Mae and Freddie Mac can raise the conforming loan limits — the maximum mortgage origination balance the GSEs are permitted to buy. Loans above the limit are known as jumbo loans.

The national conforming loan limit for mortgages that finance single-family one-unit properties increased from $33,000 in the early 1970s to $417,000 for 2006 to 2008, with limits 50% higher for four statutorily-designated high cost areas: Alaska, Hawaii, Guam, and the U.S. Virgin Islands, according to the FHFA.

The FHFA restricted the GSEs from raising the conforming loan limit until prices exceeded pre-crisis levels of one of the three HPIs, the expanded-data HPI. The FHFA defined pre-crisis levels as the level of the expanded-data HPI in the third quarter of 2007.

The MBA’s chart shows three different HPIs produced by the FHFA:  

Click to Enlarge

HPI

(Source: MBA, FHFA)

While all three indices are repeat sales indices, they each use different home price data. The all-transactions index and the purchase-only index use home price data from mortgages purchased by the GSEs.

The expanded-data index, as its name would suggest, goes a bit further. This one also incorporates information on home sales financed with mortgages insured by the Federal Housing Administration as well as other home sales transactions observed in deed records.

Although the expanded-data HPI lagged behind the other two since the housing crisis began, it has now reached 2007 levels.

Because of the price levels during the second quarter of this year, the FHFA could raise the conforming loan limit for 2017, the first such increase since 2006.

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