FHFA Proposal Looks to a Loan-Limit Reduction

Tax Professionals' Resource
December 18, 2013 — 1,899 views  
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Aided by the low interest policies of the Federal Reserve, the housing market, which collapsed during the recession of 2007, has seen a turnaround this year. The year of 2008 saw a raise in the loan limits to keep the market active during recession. Mortgage-finance giants Fannie Mae and Freddie Mac operate by purchasing mortgages and bundling them into securities and offering them to investors. It was taken over by the government at the peak of the financial crisis. The FHFA is now contemplating on reducing the loan purchase limit of Fannie Mae and Freddie Mac.

Nearly two-thirds of new home loans in the US are catered by Fannie Mae and Freddie Mac. The reduction in the loan limit will shrink their presence in the housing market and encourage private players to enter the scene.

Diving into the Details of the Proposal

The proposal is looking at cutting down the maximum size of loan of Fannie Mae and Freddie Mac by nearly 4.1 %. If adopted, the loan limits would be brought down from $417,000 to $400,000 in most places in the US. High-end areas like NYC, Los Angeles and Washington can expect cutbacks from $625,000 to $600,000. The plan is said to be going into effect from October 2014. Loans that are tendered before Oct 1, 2014 will not be affected by the act.

How it affects the Housing Market

Fannie Mae and Freddie Mac currently own nearly 67% of residential loans in the US. The change in the purchase limit will drastically affect the housing and mortgaging market. Many trade groups are insisting on keeping the loan limits the same. They say that reducing the loan purchase limits will bring about a lot of uncertainty in the fragile housing market. They are apprehensive that it might ward off buyers. Lobbyists are also skeptical about private capitals entering the market as they are concerned that it might impede the recovering housing market. But FHFA is confident that the move will have a positive impact on investors as well as the recovering housing market. Also, private players will benefit a great deal from entering the market.

The FHFA is seeking out comments from the public on whether a six-month heads up is sufficient enough to implement the plan. The move, if implemented, will put a check on the taxpayers’ losses and be an incentive for private ventures to re-enter the market.

Tax Professionals' Resource