JAMES FLYNN
More financing options

While the prices of Bay State homes rise, the yearly adjusted conforming loan limit set by Fannie Mae and Freddie Mac increases simultaneously, allowing members of the Massachusetts mortgage industry to solicit high-income bracket buyers with the more generous loan limit.

Every year in early December, Fannie Mae and Freddie Mac announce the new maximum loan amount that they agree to provide to residential homebuyers, and that limit has been rising each year based on the increase in the average price of a home in the United States.

The average price of a home, nationwide, has increased from $235,717 in November of 2002 to $243,756 last month, which translates to an increase of 3.4 percent, according to statistics from the National Association of Realtors.

Freddie Mac and Fannie Mae just officially raised that loan limit – referred to as the “conforming” loan amount – to $333,700 for 2004, from $322,700 in 2003, for a single-family home.

Loan amounts that are within the conforming limits have lower interest rates than loans above that limit.

While the increase in loan limits only benefits those who can afford the steadily rising housing costs, members of the mortgage industry said there are advantages for all home-seekers.

“For Massachusetts, the increase in conforming loan limits might help with the cost of housing by helping a person pay a lower rate. There are two [categories of] wage-earners in the state – low-income and high-income – and we see a lot more of wage-earners who are making a lot of good money, but maxing themselves out and there isn’t a lot of inventory out there to choose from,” said James Flynn, president of Hopkinton-based Marathon Mortgage. “However, there are more programs available to low-income [homebuyers] through banks and mortgage companies that allow those people to get into the housing market. These [conforming loan limit] increases aren’t going to affect the low-income housing market because it’s an affordability issue. But, it does help a small group of people … and allow more options for financing.”

Some members of the banking and mortgage industry, however, say the conforming limits, while justifiable, do not adjust relative to the current environment. For example, if housing prices go up, eventually they will most likely go down, and some industry-goers believe the conforming loan limit should reflect those changes.

“We always supported raising the mortgage limits with an inflationary index,” said Daniel J. Forte, president of the Massachusetts Bankers Association. “The concern expressed over the years is that while the index is allowed to go up, it’s never allowed to go down. And if it’s supposed to be a range and provide liquidity to banking and mortgages and help first-time homebuyers, then that should be reflective both ways.”

Fannie Mae adjusts its conforming loan limits annually and is based on the October-to-October changes in the average home price, as published by the Federal Housing Finance Board.

‘Rapid’ Appreciation

Over the past 20 years, the conforming loan limits have increased by over $200,000.

In 1985, the conforming loan limit set by Fannie Mae was $115,000. In 1986 it was $133,250 and increased to $153,100, $168,700, $187,450 and $187,600, in 1987, 1988, 1989 and 1990, respectively.

In 1991, the limit was raised to $191,250 and was increased by over $11,000 a year later to $202,300 in 1992. The limits remained constant for three years at $203,150 from 1993 to 1995 and jumped to $207,000 in 1996.

From 1997 to 1999, the conforming loan limit increased steadily from $214,600, $227,150 and $240,000, respectively. But in 2000, the loan limit starting making significant jumps based on the upward rising costs of homes around nation.

In 2000, the conforming loan limit was $252,700 and jumped almost $25,000 in 2001 to $275,000. Following the same statistic, the loan was increased to $300,700 in 2002 and $322,700 in 2003, rising only moderately in 2004 to $333,700.

“It’s adjusted based on the cost of housing throughout the United States and … it’s significant because the prices of housing are still appreciating and appreciation has still continued at a pretty rapid pace,” said Flynn.

But an additional rouse to these high-rising loan limits is the idea that it only benefits high-income homebuyers – and while some mortgage entities are obligated to also provide for low-income housing individuals, others are not and can concentrate strictly in high-income business.

“The banking industry has done a good job creating affordable housing projects, but our concerns are with mortgage bankers having access to the same publicly subsidized institutions … it’s one of the reasons why mortgage companies should have some CRA [Community Reinvestment Act] obligations,” said Forte. “Non-regulated entities have no CRA responsibility, yet they have access to the secondary market. We support the rate being reviewed every year … and it’s important that [rates] are analyzed and adjusted as the cost of housing goes up, but it should be disproportionately increased to those institutions who have a legal obligation to low- and moderate-income loans.”

However, with government-sponsored entity reform legislation currently being debated in Congress, Forte said members of the banking industry continue to utilize the tools available to them and focus on putting first-time homebuyers in homes.

“The banking industry today has a lot more tools at their disposal to hedge interest rates than they did [years ago],” and help both low and high-income consumers, said Forte. “It will be interesting to see where the GSE reform legislation will go with [conforming loan limits] legislation.”