Holy retained portfolio, Batman! With a Democratic Congress, nationwide house price depreciation, and now this,[1] Fannie and Freddie look set to swell like a pair of Fugu. MarketWatch’s reliable Rex Nutting summarized [2] it well when he wrote that "the maximum conforming loan limit for U.S. mortgages will be frozen [for a year] at current levels if home prices fall". What this means is that in a falling house price environment, a rapidly increasing proportion of the Jumbo mortgage market could fall below the GSE conforming limit of $417,000, and this magic value is now extended all the way to January 1, 2008.

I certainly hope Lockhart’s gang at OFHEO know what they are doing. Blogger CalculatedRisk is on the case [3] and it will be interesting to see his analysis. Earlier today, CalculatedRisk caught [4] the end of a related story we have been following. Tightened mortgage lending guidelines are now in place at the State as well as Federal level. I hesitate to speculate, but perhaps tighter guidelines will produce more mortgages that fall within the GSEs’ quality standards. This just might push some of the Alt-A and sub-prime business back F&F’s way too.

In any case, it looks like a lot of the business that the GSEs lost to the private label lenders may soon be coming back home to Fannie and Freddie. And remember, they still haven’t published their 10-Qs. What hath OFHEO wrought?

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Notes and References

[1]: "OFHEO establishes procedures for 2007 conforming loan limit", Press Release, OFHEO, November 15, 2006. Big thank-you to twist, who passed the news to me even before it hit the blogs and MSM. The emphasis in all the quotes is mine.

"If the October-to-October increase is negative, its effect on the maximum conforming limits will be deferred for one year. Thus, if the October 2006 average price is less than that of October 2005, the maximum 2007 loan limits will be unchanged from current levels. This year’s decrease would be netted against any increase next year in determining the 2008 limits. If a decrease in average price this year is followed by another decrease next year, the maximum loan limits will decline in 2008 by at least this year’s percentage decrease in average prices."

 

[2]: "Conforming loan limit to stay put if home prices fall", by Rex Nutting, MarketWatch, November 15, 2006.

" For most of the country, the maximum is $417,000. The maximum loan limit is typically increased each year by the level of home-price inflation.

If home prices show a decline from October 2005 to October 2006, the limit will be kept at current levels for a year, and then adjusted for 2008, James Lockhart, director of the Office of Federal Housing Enterprise Oversight, said in a statement Wednesday.
…
Lockhart said that any mortgages previously purchased or guaranteed under a higher limit should not be affected by any reduction of the limit."

 

[3]: "OFHEO: No Change to Conforming Loan Limit", CalculatedRisk blog, November 15, 2006.

[4]: "State Version of Nontraditional Mortgage Guidance Released", CalculatedRisk blog, November 15, 2006.