FHFA Plans to Reduce Fannie and Freddie Conforming Loan Limits

By Kyle Chezum Updated on 6/2/2011

 

The Federal Housing Finance Agency has announced that it plans to reduce mortgage loan limits on Fannie Mae and Freddie Mac conforming loans in October of this year.  The FHFA's plan is to use the upcoming decrease to stimulate housing demand over the summer.  In theory, homebuyers who wish to take on mortgages guaranteed by Fannie or Freddie will have to buy before October or else face a much narrower accepted price window in the fall as a result of the lowered limits.

But many experts are predicting that this move won't make much of a difference.  Already this year demand for homes has been unseasonably low.  Spring, which typically ushers in a frenzy of home buying as the weather improves in many parts of the nation, has been mostly stagnant for the real estate industry.  The likelihood is strong that a buying push in the summer won't meet with hoped for success.

More than this, many economists point out that the positive effects of the move will be short lived.  At best, home buying will increase during the summer months, but it will drop back even lower than before in October after the limits have been lowered.  Much like the housing tax credit of last year, their may be positive benefits, but they likely won't last nearly long enough to bring the housing sector out of its current slump.

In some areas, such as San Francisco and Marin, California, property values are lower than they've been in recent years but still high enough that many transactions already come in well above the current loan limits.  Dropping loan limits further will likely reduce the number of transactions made in these areas, which means the FHFA's plan may ultimately hurt the housing sector more than it helps.