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Friday, October 15, 2010

The Conforming Loan Limit

N. Eric Weiss
Specialist in Financial Economics

Mark Jickling
Specialist in Financial Economics

Two government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, buy residential mortgages from the original lenders and resell them as mortgage-backed securities to investors (or hold them in their own portfolios). The law includes a conforming loan limit, a ceiling on the size of loans the GSEs can buy.

In September 2010, the Continuing Appropriations Act of 2011 (P.L. 111-242) extended the highcost area limits for FY2011. In October 2009, the FY2010 Department of Interior appropriations bill (P.L. 111-88) extended without change the standard limit at $417,000, which was first established administratively for 2006. The bill also continued the higher limit authorized by the Economic Stimulus Act of 2008 (ESA; P.L. 110-185) and the Housing and Economic Recovery Act of 2008 (HERA; P.L. 110-289) in “high-cost” areas; this higher limit depends on house prices in an area and cannot exceed $729,750.

Securitization of mortgages that exceed the limit—called non-conforming jumbo loans—is done by private financial institutions, although in the present financial environment virtually no jumbo mortgages are being securitized. GSE status allows Fannie and Freddie to issue debt at lower cost than other private firms; part of this subsidy is passed on to home buyers in the form of lower interest rates. Interest rates on jumbo mortgages are slightly higher than those on the conforming loans that the GSEs can purchase. The spread between non-conforming jumbo and conforming loan rates has been elevated the start of the financial crisis.

In the current financial crisis, the market for private, non-GSE mortgage-backed securities has all but disappeared, as investors are unwilling to accept the risks without the GSE guarantee. Fannie and Freddie continue to buy mortgages, but there is little information to indicate the extent of their purchases of loans over the $417,000 limit.

This report analyzes the implications of raising the conforming loan limit in high-cost areas.

Date of Report: October 4, 2010
Number of Pages: 9
Order Number: RS221720
Price: $19.95

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