In an effort to scale back the governmentâ€™s dominance in the mortgage market, the Federal Housing Finance Agency (FHFA) is planning for a reduction in conforming loan limits for implementation on January 1, 2014. Under the change, there would be a decrease in the maximum size of home-mortgage loans eligible for backing by Fannie Mae and Freddie Mac. Currently both of the enterprises cannot back loans of more than $417,000, although the cap can reach as high as $625,500 in expensive markets like California.
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The real estate industry has questioned the consequences of adjusting conforming loan limits, such as reducing the pool of potential home buyers or derailing the current housing recovery.
The FHFA has yet to announce how far it will reduce the loan limits, but stated that a â€œgradual reduction in loan limits is an appropriate and effective approach to reducing taxpayers' mortgage-risk exposure.â€
In response to the proposal, Gary Thomas, president of the NATIONAL ASSOCIATION OF REALTORSÂ®, commented the following: â€œIt would be counterproductive to make changes to the loan limits before private capital is fully engaged.â€
In 2008, the caps were increased to address concerns about mortgage liquidity during the financial crisis. Critics contend if the caps are changed, larger loans will be more difficult and costly to obtain.
The Mortgage Bankers Association announced it expects to see the loan limits adjusted downward to $400,000 for the majority of the country and $600,000 in pricier markets.
By reducing the limits for Fannie Mae and Freddie Mac, more business could be shifted to the Federal Housing Administration since it has less restrictive terms.
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