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[OFHEO Guidance] Stuck With Mudd On $417,000

The Office of Federal Housing Enterprise Oversight [1], which has actually had to engage in a lot of oversight as of late, has been in the unenviable position of deciding whether to expand the conforming loan limit. [2] It has been stuck at $417,000 for the past three years. OFHEO Director James B. Lockhart, who was nominated by President Bush and approved by Congress back in 2006, just as things began to get interesting. OFHEO used to be a sleepy oversight agency, responsible for the two GSEs: Fannie Mae and Freddie Mac that appear to rubber stamp everthing the GSE requested. No more.

Here’s the official guidance. [3]

President and Chief Executive Officer of Fannie Mae, Daniel Mudd agrees with Lockhart on expanding the conforming loan limits to ease the credit crunch [4].

OFHEO is now on the hotseat because the GSEs have become a key ingredient to restoring investor confidence in the secondary mortgage market, which is a key ingredient to returning liquidity to the credit markets. I have been fairly critical of the agency of the years, but I have to say that Lockhart’s timely and tireless actions seem to be what the doctor ordered.

In theory, the conforming loan limit should float with the housing market but as the market has been declining, the conforming mortgage ceiling has remained unchanged. OFHEO decided that the rate should not be dropped because of the existing complexity of implementing the temporary increase of the conforming loan limit beginning on Setember 1st as a step to help the credit markets.

The conforming loan limit is adjusted annually through a calculation of year-over-year October changes to the level of home prices based on data from the Federal Housing Finance Board’s (FHFB) Monthly Interest Rate Survey (MIRS). As many commenters suggested, the small and voluntary MIRS price survey is volatile, which is another reason for this guidance to emphasize stability. Pending GSE reform legislation would allow the selection of a broader and more comprehensive price index.

It sounds like there will be more transparency in selecting the way the mortgage cap will be adjusted in the future. While I think that the rate should be adjusted up and down, not just up, it’s a catch-22 really. Lowering the rate will reduce financing availability for markets on the fringe, and that in turn, will weaken certain housing markets causing more defaults. Of course, it has the potential to make investors more skittish about conventional mortgages because the risk/value relationship is being expanded (market values drop, mortgage cap remain the same, risk spread widens).

And why do we borrow until it hurts? [5]

No offense to Daniel or Roger intended, but what’s mud spelled backwards? [6]