Housing Finance

Implications of Alternative Methods of Adjusting the Conforming Loan Limit Gao ID: RCED-95-6 October 5, 1994

The Housing and Community Development Act of 1980 caps the size of mortgages that can be purchased by either Fannie Mae or Freddie Mac. The act allows the conforming loan limit to be adjusted annually so that Fannie Mae and Freddie Mac can respond to changing conditions. For 1994, the conforming loan limit is $203,150. This report reviews the methodology used to adjust the conforming loan limit. GAO (1) assesses the effect on the loan limit of using alternative adjustment methods, (2) determines the implications of Fannie Mae's and Freddie Mac's decisions not to adjust the loan limit for 1994, and (3) provides information on how users of the Finance Board's data view the data's accuracy.

GAO found that: (1) using alternative methods for adjusting the mortgage loan limit would not have substantially changed the 1993 loan limit or the share of the conventional mortgage market that would fall within the conforming loan limit; (2) of the four alternatives tested, three did not change the loan limit by more than 7 percent of the 1993 limit; (3) the alternative adjustment method that used actual home prices as its basis changed the loan limit by more than 14 percent; (4) 93 percent of all conventional loans were at or below the actual conforming limit in 1993; (5) the decision to maintain the 1993 loan limit in 1994 is legislatively authorized, should allow both companies to serve the same share of the mortgage market, and should ease potential disruption to lenders; (6) maintaining the 1993 conforming loan limit may lower some borrowers' interest rates; (7) the 1995 loan limit may be adjusted upward because the legislation requires that adjustments be made annually; (8) an upwardly biased loan limit could lower some borrowers' interest rates, increase the number of loans available for purchase, decrease the number of jumbo loans, and affect Federal Housing Administration (FHA) loan limits if FHA loan limits are indexed to the conforming loan limit; (9) most data users find the Finance Board's data to be generally accurate; and (10) the Finance Board is the only comprehensive source of national data on housing price changes for new and existing homes.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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