Now that average U.S. home prices have increased to near-peak levels, is it time for the government-sponsored enterprises (GSEs) to raise conforming loan limits?
According to Black Knight Financial Services’ Mortgage Monitor report for September, raising loan limits now could help boost origination volumes – albeit slightly.
Ben Graboske, executive vice president for Black Knight Data & Analytics, says now that home prices are within 0.7% of the peak seen in 2006, there is a “growing discussion surrounding conforming loan limits.”
“The Housing and Economic Recovery Act of 2008 restricted any additional increases in the conforming loan limit until national home values returned to pre-crisis levels,” he explains in the report. “Now that we’ve reached that point by multiple measures, the GSEs can consider raising the national conforming limit above the static $417,000, where it has stayed for the last 10 years – aside from the 234 designated ‘high-cost’ counties, of course.”
So, what would be the benefit in doing this?
“Our analysis shows that there are approximately 17 times as many originations – roughly 100,000 in total over the past 12 months – right at the conforming limit compared to preceding dollar amount buckets and that originations drop off by about 70 percent immediately above the limit,” Graboske explains “In addition, the data shows that a GSE loan originated right at the conforming limit is nine times more likely to carry a second lien than one that is not. One example scenario shows that, with all else being equal, raising the conforming loan limit by $10,000 could result in a one percent increase in originations – approximately 40,000 new loans and $20 billion in new loan balances.”
The report shows that the average U.S. home value increased by $13,500 from last year, but low interest rates have kept the monthly principal and interest payment needed to purchase a median-priced home almost equal to one year ago.
Should interest rates increase, however, that will change. Homes will become less affordable, resulting in more second liens. That’s a good justification for raising loan limits, the firm argues in its report.
Black Knight’s research shows that GSE loans originated at conforming limits are nine times more likely to have a “piggyback” second lien.
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