The Conforming Loan Limit

N. Eric Weiss
Specialist in Financial Economics

Mark Jickling
Specialist in Financial Economics

Congress is concerned with the pace of the recovery in the housing and mortgage markets. A series of laws starting with the Economic Stimulus Act of 2008 (ESA; P.L. 110-185) were designed to increase the availability and affordability of mortgages in “high-cost” areas. This concern about housing and mortgage markets is balanced by attention being paid to possible taxpayer financial risks and the desire to minimize government intervention in economic markets.

Two congressionally chartered government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, provide liquidity to the mortgage market by purchasing residential mortgages from the original lenders and either reselling them as mortgage-backed securities to investors or holding them as investments in their own portfolios. Their charters include a ceiling on the size of loans the GSEs can buy.

At the end of FY2011 (September 30, 2011), the maximum limit in high-cost areas was reduced to $625,500 from $729,750. The current high-cost limit is calculated as 115% of the area median house price, but cannot exceed 150% of the national limit or $625,500. The limit in other areas of the nation remains unchanged since 2006 at $417,000.

Securitization of mortgages that exceed the applicable 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 and is now about three-fourths of 1%.

According to recent Congressional testimony, most recent home purchase mortgages are guaranteed by FHA and securitized by Ginnie Mae; the majority of mortgages purchased recently by Fannie Mae and Freddie Mac have refinanced existing mortgages.

H.R. 3084 (Mortgage Credit Availability Act of 2011), H.R. 2508 (To Extend through Fiscal Year 2013 the Increase in the Maximum Original Principal Obligation of a Mortgage that May Be Purchased by the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation, and For Other Purposes), H.R. 1859 (Housing Finance Reform Act of 2011), H.R. 1754 (Preserving Equal Access to Mortgage Finance Programs Act), and H.R. 2413 (Secondary Market Facility for Residential Mortgages Act of 2011) would extend the $729,750 high-cost area conforming loan limit for various time periods.

H.R. 1182 (GSE Bailout Elimination and Taxpayer Protection Act), S. 178 (Spending Reduction Act), and S. 693 (GSE Bailout Elimination and Taxpayer Protection Act) would eliminate the high-cost loan limits. This report analyzes the implications of the higher conforming loan limit in high-cost areas.


Date of Report: November 22, 2011
Number of Pages: 12
Order Number: RS22172
Price: $29.95

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