Demand For Higher Loan Limits

The Employment Situation report for October was a solid one again, with 161,000 new jobs, less than analysts’ consensus of 178, but in the mid-range of their estimates. The unemployment rate fell 0.1% to 4.9%, which Econoday says some consider full employment. Probably the sweetest data nugget however was average hourly earnings. They rose “an outsized” 0.4% bringing the year-over-year rate to 2.8%, a post-recovery peak.

Conforming loan limits, the maximum size of a mortgage that can be sold to or guaranteed by Fannie Mae and Freddie Mac, (and used by the VA and FHA as well) are adjusted annually but they have not budged since 2006. The limit was at $417,000 for most of the nation, although 294 “high cost” counties had limits as high as $721,050. Then the housing market crashed and Congress passed emergency legislation preventing any upward adjustment until national home prices returned to pre-crisis levels. Since prices are a hairsbreadth away from that goal, chatter about raising the limits has begun.

Black Knight Financial Services analyzed all loans originated just below and above the limit over the last year, looking at them in $1,000 “buckets” They found a pretty consistent number of originations in 15 of the 16 buckets just under the limit. In the 16th, the $416-$417,000 bucket, there is a 17-fold increase; 100,000 loans in that tiny little pail; 1.5% of all loans originated and 2,5% of the dollar volume. In the very next bucket, the one labeled $417,001, originations plummeted by 70%. This means, Black Knight explains, that many people are bringing money to the closing table or using “piggy-back” mortgages to fit under the limit.

They also found that “piggy-back,” originations skyrocket right at the cusp of the loan limit. Loans in that final bucket are nine times more likely to have a second than other loans and one quarter of the total have one.

The take-away, Black Knight says, is a strong demand for a higher limit. The company estimates raising it by $10K would result in a 1% increase in lending– 40,000 more loans next year–$20 billion worth. There is a congressionally mandated formula for adjusting loan limits and this is the season. The Federal Housing Finance Agency should be unpacking their slide-rules soon.