Plans to Reduce Conforming Loan Limits Under Heavy Fire from Industry Groups, Congress

Pressure appears to be building on the Federal Housing Finance Agency's (FHFA) acting director to back down or at least delay an intended reduction in conforming loan limits for Fannie Mae and Freddie Mac (the GSEs).  In August Edward J. DeMarco announced plans to scale back existing limits on the size of conventional loans that can be purchased by the GSEs.  The current limit is $417,000 with exceptions for counties deemed to have high cost housing where the limit is as high as $625,000.   DeMarco proposed a gradual reduction as one mechanism to encourage the return of private money to the mortgage market and to reduce the government's housing finance footprint.

Industry groups began almost immediately to question both the wisdom of a reduction and the authority of DeMarco to take the action without congressional authority.  It now appears they have unified to press their demands and have picked up some congressional support.

On Tuesday, 15 industry groups including the National Associations of Home Builders (NAHB), Realtors (NAR), Credit Union Associations, and the Land Title Association, Credit Union National Association, and the Mortgage Bankers Association sent a letter to DeMarco stating that "a reduction of the conventional conforming loan limit to $400,000 would have impacted nearly 154,000 borrowers in 2012, many of whom were in markets still in recovery."  The group said that many of these borrowers could not have qualified for loans under the tighter private market standards. "These conditions leave the American dream out of reach for many families. Lowering the loan limits further restricts liquidity and makes mortgages more expensive for households nationwide."

The letter also argues that with several sets of regulations promulgated by the Consumer Financial Protection Bureau (CFPB) as part of Dodd-Frank requirements already slated to begin in January, changing loan limits at this time would further complicate the lending process. The signers "believe such changes at this time would have a very disruptive impact on the availability of affordable housing credit, on our housing recovery and our economy as a whole."

The legal authority of FHFA to lower the loan limits without congressional action is also challenged.  The authors cite language in the Housing and Economic Recovery Act of 2008 (HERA) which it says specifically prohibits the limits from decreasing.

"If the change in such house price index during the most recent 12-month or 4-quarter period ending before the time of determining such annual adjustment is a decrease, then no adjustment shall be made for the next year, and the next adjustment shall take into account prior declines in the house price index, so that any adjustment shall reflect the net change in the house price index since the last adjustment. Declines in the house price index shall be accumulated and then reduce increases until subsequent increases exceed prior declines."

The industry letter follows at least two sent independently by members of the coalition.  In mid-September NAR sent a letter to DeMarco questioning a number of FHFA actions and in particular the legal authority of FHFA to lower the loan limits.  These were the legal concerns reiterated on Tuesday.

On October 4 MBA President David Stevens joined in with a letter outlining similar concerns about exacerbating existing burdens from implementation of Dodd-Frank rules.  The letter warned of the danger that additional changes and uncertainty "run the risk of reversing the progress made thus far in the housing recovery." 

Stevens, however, did not demand that loan limits remain static but instead urged FHFA to monitor the impact of the new CFPB rules and reassess conditions six months after full implementation "to determine the industry's capacity to meet credit needs in the core of the mortgage market, particularly the segments that could be impacted by any reduction in loan limits."

Next came a letter to DeMarco signed by a non-partisan group of 13 senators lead by Senator Bob Menendez (D-NJ) and Johnny Isakson (R-GA).  The group urged FHFA to leave any changes in loan limits to Congress, and asked FHFA to demonstrate both their authority for acting unilaterally and an analysis of the potential impact on housing markets and the economy.  According to NAHB, two congresspersons, Gary Miller (R-CA) and Carolyn Maloney (D-NY) were preparing a similar letter to be sent to DeMarco this week.

The pressure may be working.  According to the Journal the original plans to change the limits envisioned a January 1, 2014 start date.  More recently it appears that any changes will not go into effect until spring.  Perhaps this could be an easy compromise for the industry; the letter sent Tuesday concludes with the plea, "Please do not further complicate this time by changing the mortgage loan limits at this time."  The emphasis is theirs.

In addition to those listed above the Tuesday letter was signed by American Escrow Association, American Financial Services Association, Asian Real Estate Association of America, Coalition of US Mortgage Insurers, Community Home Lenders Association, Community Mortgage Lenders of America, Leading Builders of America, National Association of Hispanic Real Estate Professionals, and the Realty Alliance