Jumbo Decline

A scheduled change in conforming loan limits for government-sponsored enterprises Fannie Mae and Freddie Mac, and the Federal Housing Administration, could put a damper on already depressed home prices, according to a new study from the National Association of Home Builders' Economics and Housing Policy Group.

The size of conforming loans - also know as jumbo mortgages - for the GSEs currently is limited to $417,000 but can rise to $729,750, depending on local median home prices. These limits, however, are set to revert Oct. 1 to lower permanent criteria for high-cost areas under the Housing and Economic Recovery Act of 2008, unless Congress acts to extend these levels. The base limit will stay at $417,000, but the formula for establishing loan limits for high-cost areas will decrease from 125 percent to 115 percent of the area median home price, and the national ceiling will drop from $729,750 to $625,500.

Homes that will become ineligible to be purchased and securitized by the GSEs or to be purchased with FHA financing as a result of the lower limits would likely require mortgage financing with higher interest rates and other less favorable loan terms, such as higher down payments and stricter credit requirements, according to NAHB economists Robert Dietz and Natalia Siniavskaia, authors of the study. The pressure on home prices could extend beyond homes directly affected by the lower limits, the study warns, as home sales are interrelated - such as first-time buyers purchasing homes from move-up buyers eyeing a pricier home. Using data from the U.S. Census Bureau's 2009 American Community Survey, the study estimated 5 million homes would be ineligible for GSE funding due to the new loan limit. and more than 12 million homes would be ineligible for FHA-insured mortgages.