Fannie-Freddie to Raise Conforming Loan Limits in 2017

The Federal Housing Finance Agency today announced that the maximum baseline conforming loan limit for mortgage loans acquired by Fannie Mae and Freddie Mac in 2017 will increase to $424,100 from $417,000. This will be the first increase in the conforming loan limit since it was raised to $417,000 in 2006.

The Housing and Economic Recovery Act of 2008 established $417,000 as the baseline loan limit and mandated that after a period of price declines, the baseline loan limit would not be permitted to rise until home prices had returned to pre-decline levels.

The loan limit will rise 1.7% in 2017 because the Federal Housing Finance Agency has determined that the average U.S. home value in the third quarter of this year increased 1.7% above its level in the third quarter of 2007.

Higher loan limits will be in effect in higher-cost areas as well. In areas where 115% of the local median home value exceeds the baseline loan limit, the maximum area loan limit will be higher. The new ceiling loan limit in high-cost markets will be $636,150 (150% of the $424,100) for single-family properties. The previous ceiling was $625,500.

Special statutory provisions establish different loan limit calculations for Alaska, Hawaii, Guam and the U.S. Virgin Islands. In these areas, the baseline loan limit will be $636,150 for single-family properties, but actual loan limits may be higher in some specific locations. A list of the 2017 maximum conforming loan limits for all counties and county-equivalent areas in the country may be found here.

FHA Proposes New Condo Approval Rules

The Federal Housing Administration  is proposing a new rule for condominium developments that the agency says is intended to be more flexible, less prescriptive and more reflective of market conditions.

The agency is proposing to reinstate spot approvals in unapproved condominium developments and require condo projects to re-certify their approval status every three years rather than the current two.

The Federal Housing Administration currently stipulates that approved condominium developments have a minimum of 50% of the units occupied by owners. To respond to future market changes, the agency is proposing to establish an allowable range between 25% and 75%.

Regarding commercial/nonresidential space within an approved condominium development, Federal Housing Administration currently requires that this should not exceed 50% of the project’s total floor area. The agency anticipates maintaining this requirement in the near term, but to achieve added flexibility Federal Housing Administration is proposing to establish a range of between 25% and 60% via subsequent notice.

View HUD’s press release and Federal Housing Administration’s proposed rule.

FHFA House Price Index Up 0.5 Percent in July 2016

From the Federal Housing Finance Agency:

U.S. house prices rose in July, up 0.5 percent on a seasonally adjusted basis from the previous month, according to the Federal Housing Finance Agency monthly House Price Index. The previously reported 0.2 percent increase in June was revised upward to reflect a 0.3 percent increase.

The Federal Housing Finance Agency monthly House Price Index is calculated using home sales price information from mortgages sold to, or guaranteed by, Fannie Mae and Freddie Mac. From July 2015 to July 2016, house prices were up 5.8 percent.

For the nine census divisions, seasonally adjusted monthly price changes from June 2016 to July 2016 ranged from +0.2 percent in the Middle Atlantic division to +1.0 percent in the East South Central division. The 12-month changes were also all positive, ranging from+2.6 percent in the Middle Atlantic division to +7.7 percent in the Pacific division.

Monthly index values and appreciation rate estimates for recent periods are provided in the table and graphs on the following pages. Complete historical downloadable data and House Price Index release dates for 2016 and 2017 are available on the House Price Index page.

For detailed information on the House Price Index, see House Price Index Frequently Asked Questions (FAQ). The next House Price Index report will be released October 25, 2016 and will include monthly data through August 2016.

Credit Standards on AD&C Construction Lending: A Tale of Two Sectors

For a more succinct version of this report, click here.

According to National Association of Home Builders’ Survey on Acquisition, Development & Construction Financing, residential real estate builders and developers reported that credit conditions for acquisition, development, and single-family construction loans were easier in the second quarter of 2016 than in the first quarter of 2016. Hence the National Association of Home Builders net tightening index dropped from its level in the first quarter.

Following 5 consecutive quarterly declines in the pace of net easing, more respondents on net, 25.0%, reported that credit standards on acquisition, development, and single-family construction financing had eased in the second quarter of 2016 from the first quarter. In the first quarter of 2016, 13.3% of survey respondents on net indicated that overall lending standards on acquisition, development, and single-family construction loan availability had eased. However, the net share of respondents reporting that lending conditions have eased in the second quarter of 2016 is lower than the net share reporting easier standards at the same time in 2015, 30.7%. The index is constructed so that negative numbers indicate credit easing, and positive numbers mean that credit is tightening.

The Federal Reserve Board also tracks lending standards on acquisition, development, and single-family construction lending. In contrast to the National Association of Home Builders results, the Federal Reserve Board’s Senior Loan Officer Opinion Survey indicates that lending standards continue to tighten. As illustrated by Figure 1 above, lending conditions reported by the Federal Reserve Board began to tighten on net in the second quarter of 2015 and has remained tight in successive quarters.

Given the recent divergence of the two indexes it is important to understand the similarities and differences between them. Although both the National Association of Home Builders’ Survey on acquisition, development, and single-family construction Financing and the Fed Senior Loan Officer Opinion Surve track acquisition, development, and single-family construction lending conditions, the Fed survey includes commercial real estate lending excluded from the National Association of Home Builders measure, most importantly nonresidential construction loans. Illuminating the significance of this difference, summary statistics on the outstanding amount of acquisition, development, and single-family construction loans provided by the Federal Deposit Insurance Corporation indicate that home building construction loans are the smaller portion of all acquisition, development, and single-family construction loans on bank balance sheets, as shown in Figure 2 below. The inclusion of nonresidential construction loans in the Fed’s index and their dominant size over residential construction loans is likely an important factor in the recent divergence.

One caveat in this analysis is that the lending standard surveys are focused on the origination of new loans, while the Federal Deposit Insurance Corporation data captures the yearend stock of loans, reflecting the net flows in (e.g., originations) and flows out of bank loan portfolios over the course of the year. If recent originations, and associated lending standards, in the Fed survey do not reflect the proportions in the current stock of loans, inclusion of the nonresidential construction loans explains less of the divergence.

The role played by regulations imposed by Basel III could be another potential reason for the recent difference in the results of the two surveys. Basel III refers to the significant revisions made to the regulatory capital rules for banking organizations. Basel III introduced the concept of High-Volatility Commercial Real Estate. Under the new rules, High-Volatility Commercial Real Estate was broadly defined as all acquisition, development, and single-family construction commercial real estate loans except one-to-four family residential acquisition, development, and single-family construction loans.

Under the Basel III bank regulations, unless certain exceptions are met*, all loans that meet the definition of High-Volatility Commercial Real Estate are assigned a risk weighting of 150% for risk-based capital purposes. Prior to January 1, 2015, these loans would have typically been assigned a risk weighting of 100%. Loans for 1-4 family residential construction were not included in this higher risk weight category instead requiring a risk weight of 50% or 100%.

To the extent the higher capital requirements dissuade lenders from making High-Volatility Commercial Real Estate loans (and this is reflected in lenders’ responses to the Fed survey), the higher capital requirements could represent an implicit tightening of lending standards, as opposed to an explicit tightening (e.g., higher credit scores, lower LTVs, etc.), and contribute further to the divergence between the two surveys.

Banks, both those with only domestic offices and those with both domestic and foreign offices, report the outstanding amount of High-Volatility Commercial Real Estate in their quarterly reports of condition and income, commonly referred to as “call reports”. Using information in the bank-level data provided by the Federal Financial Institutions Examination Council (FFIEC), Figure 3 below shows the distribution by risk weight of the outstanding amount of High-Volatility Commercial Real Estate loans, both the amount held for sale and the amount of loans and leases net of unearned income.

Consistent with the intent of the new regulations, the majority of High-Volatility Commercial Real Estate loans have a risk weight of 150%. In the first quarter of 2015 89% of the outstanding amount of High-Volatility Commercial Real Estate loans had such a risk weight. By the second quarter of 2015 97% of High-Volatility Commercial Real Estate loans had a risk weight of 150%. The sharp increase in the proportion of High-Volatility Commercial Real Estate loans with a risk-weight of 150% may simply reflect misinterpretation of the definition of High-Volatility Commercial Real Estate loans. The Federal Deposit Insurance Corporation published answers to frequently asked questions dated March 31, 2015. These answers contained specific examples of what loans constituted High-Volatility Commercial Real Estate debt and suggest that there was some confusion regarding the High-Volatility Commercial Real Estate categorization. Since the second quarter of 2015, the share of High-Volatility Commercial Real Estate loans has further concentrated in the 150% risk weight category.

* As discussed by the American Bankers Association, the exclusions to the High-Volatility Commercial Real Estate definition are more nuanced. As they explain, in addition to 1-4 family residential acquisition, development, and single-family construction loans another exception includes commercial real estate loans that meet the following 3 criteria.

1.) Meet applicable regulatory LTV requirements

2.) The borrower has contributed cash to the project of at least 15 percent of the real estate’s “appraised as completed” value prior to the advancement of funds by the bank

3.) The borrower contributed capital is contractually required to remain in the project until the credit facility is converted to permanent financing, sold or paid in full.

** The Federal Deposit Insurance Corporation provides the following definitions for each risk bucket:

0% risk weight – The portion of any High-Volatility Commercial Real Estate exposure that is secured by collateral or has a guarantee that qualifies for the zero percent risk weight. This would include the portion of High-Volatility Commercial Real Estate exposures collateralized by deposits at the reporting institution.

20% risk weight – The portion of any High-Volatility Commercial Real Estate exposure that is secured by collateral or has a guarantee that qualifies for the 20 percent risk weight. This would include the portion of any High-Volatility Commercial Real Estate exposure covered by an Federal Deposit Insurance Corporation loss-sharing agreement.

50% risk weight – The portion of any High-Volatility Commercial Real Estate exposure that is secured by collateral or has a guarantee that qualifies for the 50 percent risk weight.

100% risk weight – The portion of any High-Volatility Commercial Real Estate exposure that is secured by collateral or has a guarantee that qualifies for the 100 percent risk weight.

150% risk weight – High-Volatility Commercial Real Estate exposures, as defined in §.2 of the regulatory capital rules excluding those portions that are covered by qualifying collateral or eligible guarantees.

Application of Other Risk-Weighting Approaches – Any High-Volatility Commercial Real Estate exposure that is secured by qualifying financial collateral that meets the definition of a securitization exposure or is a mutual fund.

A Renewed Push for Housing Finance Reform

In an effort to advance housing finance reform that will provide certainty and stability to the nation’s financial markets and promote job and economic growth, NAHB has updated its 2012 white paper on this key housing issue.
Why Housing Matters: A Comprehensive Framework for Housing Finance System Reform reflects market developments since 2012 and retains the central tenet of NAHB’s housing finance system reform policy – the creation of a new securitization system for conventional mortgages backed by private capital and a privately funded mortgage-backed insurance fund with a federal government backstop in the event of catastrophic circumstances.
NAHB supports comprehensive finance reform based on the bipartisan Johnson-Crapo bill (S. 1217) approved by the Senate Banking Committee in the last Congress that would gradually transition Fannie Mae and Freddie Mac into a private-sector-oriented system, where the federal government’s role is clear, but its exposure is limited.
The home building industry’s ability to meet the demand for housing and contribute significantly to the nation’s economic growth depends on an efficient housing finance system. However, years after the fact, home buyers and builders continue to confront challenging credit conditions triggered by an overzealous regulatory response to the Great Recession.
While there are many reasons Congress and federal regulators must tackle housing finance reform, some stand out as compelling:
  1. The Housing Act of 1949 pledged a “decent home and a suitable living environment for every American family.” That principle remains a bedrock for Americans, although delivering on the promise is more difficult in 2015 and beyond.
  2. Homeownership has been the most effective step on the ladder into the middle class and to create wealth for most Americans since the 1950s, and continues to fill that role while also fulfilling the promise of the Housing Act of 1949.
  3. Housing is “made in America.” The jobs that home building creates cannot be shipped overseas. Most of the products used in home construction are manufactured here in the U.S. and directly correlate to American manufacturing jobs at all levels.
  4. A reformed national housing finance policy supports the Housing Act of 1949’s goals. Equally important, fixing an inefficient housing finance system that lacks effective financial safeguards for the nation’s housing and mortgage markets will markedly reduce the probability of triggering another catastrophic Great Recession.
NAHB will continue to work diligently with policymakers to advance housing finance reform that will maintain an appropriate level of government support to preserve financial stability, encourage private capital back into the marketplace and ensure liquidity and stability for homeownership and rental housing.