by Calculated Risk on 11/01/2006 04:36:00 PM

From Reuters: Limit on GSE-eligible mortgages may decline for '07

Declining home values in 2006 may reduce the size of loans eligible for purchase by Fannie Mae and Freddie Mac, raising consumer borrowing costs in some high-priced regions, analysts said.

The so-called "conforming" loan limit is based on home prices in the Federal Housing Finance Board's Monthly Interest Rate Survey, which have declined 3.1 percent in the 12 months through September. The limit for 2007 will be calculated upon release of October data on Nov. 28.
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The loan limit has not declined since falling by $150 in 1990 to $187,450. Its 15.9 percent jump for 2006 more than doubled the average rise during the decade-long housing boom.

Loan limits are set with Federal Housing Finance Board data by the Office of Federal Housing Enterprise Oversight (OFHEO), the regulator of Fannie Mae and Freddie Mac. It is unclear whether OFHEO has discretion over its model in setting the loan limits, analysts said.

"We believe that if OFHEO follows its procedures strictly to the letter, there will be a small decline in the conforming loan limit for 2007," UBS analysts said in a research note.