The Office of Federal Housing Enterprise Oversight released proposed guidance yesterday covering the calculation of conforming loan limits. If implemented as proposed, OFHEO’s guidance would ostensibly lead to a decrease in the conforming loan limit — if home prices drop by more than 0.84 percent this year. I think. I’ve read the proposed guidance more than once, and I’m getting tripped up on sections 2(A) and 2(B), which deal with how to implement changes when average home prices decline. The guidance suggests that the impact of any decline on loan limits is deferred one year, and if the subsequent year sees an increase in average price, that increase is then offset by whatever deferred decrease has yet to be implemented.
(2) After deferring the impact of a decline in the average price level for one year
(A) if the price level falls in the following year, the latter decline will be deferred one year, and the maximum loan limit will be adjusted by the decline of the former year. However, the decrease will deferred to the next year unless it exceeds one percent (1%); or (B) if the price level increases the following year, then the prior year’s (or years’) decline(s) will be subtracted from such increase, unless such subtraction(s) result(s) in a decrease of less than 1%, in which case such decrease will be carried forward to the next year.
But there’s some floor/ceiling language here — and that language is convoluted enough that I can’t quite understand the suggested implementation clearly. I’m interpreting it to read that the effect of decreases in average prices are not implemented until the aggregated previous losses reach a magnitude greater than 1 percent. If that’s correct, what’s the point in aggregating past losses in home values, until finally some arbitrary magnitude of loss is reached, at which point the conforming limit takes a potentially much larger downward dive than market conditions would have otherwise dictated? If you’re feeling lucky, here’s the proposed guidance.