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Conventional Loan Limits to Drop in 2014

Conventional Loan Limits Apply

Loan Limits Apply

Orange County, CA – The FHFA (Federal Housing Finance Agency) has chosen to lower the cap on mortgages backed by Fannie Mae and Freddie Mac. At the moment, you can get a conventional loan for up to $417,000 in most areas and up to $625,500 in expensive markets like Orange County. The new loan limits haven’t been announced yet, but they have said unequivocally that they’re going to be lower.

Potential Effects of a Cap Cut

According to data compiled by Lender Processing Services, reducing the conventional loan limits by a mere $25,000 in both cases would prevent hundreds of thousands of home purchases across the country, primarily in the middle and upper-middle range of the housing markets. Places that are upscale, but not the top of the line, but places that are still quite well-to-do.

Last year, more than two hundred thousand of the Fannie/Freddie backed mortgages given out were within $25k of the current caps. While that’s only about 3% of all Fannie/Freddie backed loans in general, there are certain areas where they represent as many as 10% of those loans — areas that would almost certainly see a dramatic slowdown of the housing industry if the caps were substantially lowered.

Needless to say, if the cuts are larger, the housing markets will slow more dramatically.

Pulling Out of the Mortgage Market

The FHFA claims that the reduced conventional loan limits are part of a longer-term strategy to reduce the government’s role in the mortgage market. That role increased in 2008, with the Great Recession and the housing bubble popping, and the current administration believes it’s wise to reduce government intervention as the housing recovery moves forward.

Denise Dunckel, a spokeswoman for the FHFA, said “A gradual reduction in loan limits is an appropriate and effective approach to reducing taxpayer’s mortgage risk exposure,” adding that any such change would be announced for implementation on Jan. 1, 2014.

The question, of course, is whether or not the housing recovery will continue apace if the FHFA cuts back too much. Many people in well-off areas rely on Fannie- and Freddie-backed loans to acquire housing in those areas — they simply wouldn’t be able to get a private mortgage for the same amount.

Timing Is Everything

This is all compounded by the fact that house prices are increasing in many markets, so the demand for larger mortgages is being met with a deliberate cut in supply by the FHFA. Some will argue that this would be an appropriate time to raise the loan limits. A drop in mortgage caps means that private lenders will have to step in to fill that gap…if they choose. Private lenders will only do so if it makes sense financially. But we must keep in mind that these loan limits are only a few years old. In the recent past, all loans greater than $417,000 were made by private lenders. So getting back to the norm is not too shocking in the long run but could be in the short run.

Private lenders are feeling conservative because of the new Qualified Mortgage and Qualified Residential Mortgage laws which are also scheduled to come into effect at the beginning of next year. Until the markets assess the effects of those changes, there’s just no good way to predict the amount of impact that the FHFA’s plan will have on the housing recovery. Nor do we know just how much these loan limits will change.

What we do know is that the conventional loan limits are expected to drop and there is time before they do. If you’re looking for a loan between $417,000 and $625,500 in Orange County, or another high cost area, then you need to consider doing that before the end of the year.

Contact me if you have questions or needs that you would like to have addressed.

Scott Storace – 949.973.0141

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