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.

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* 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.

View the NAHB white paper on housing finance system reform.

Southeast Builder Financing Fair

Your Home Builders Association is planning a builder financing fair to provide a one-stop venue for builders and developers in the region to meet with potential funding sources.

Below are the vital details on the Southeast Builder Financing Fair:

• What: Southeast Builder Financing Fair
• When: May 20, 10 a.m. until 4 p.m. 
• Where: Georgia International Convention Center

The Southeast Builder Financing Fair will feature a diverse range of debt and equity sources including local, regional and national banks as well as private investors and financial advisors. Participation in the Financing Fair will only be available to members of the Home Builders Association.  There will be no cost to participate.
We expect to have at least 20 financial firms on site. In advance of their arrival, attendees will be able to schedule private meetings with financial firms or advisors. In addition, there will be an education program on financing opportunities, informal networking, and lunch will be provided.

Registration for the Financing Fair will open April 1, your Home Builders Association will provide links to the registration site, a list of participating financial institutions and a description of the on-site educational program. Instructions on how to schedule meetings will be issued in early May to members who have registered.

Did You Know? Housing Finance

Did you know that 91.2 percent of all new mortgages are backed by Federal government programs like Fannie Mae and Freddie Mac?  And now that our government has replaced private enterprise in the mortgage finance business, Congress wants to end the program.

You can help by telling Congress to take a more gradual approach to housing finance reform.  Click here to answer your HBA's call to action on housing finance reform.

NAHB: Tax code rewrite threatens homeownership, rental housing, and home building

The U.S. Senate is considering revamping the tax code which could eliminate some or all housing tax incentives. The Senate Finance Committee recently announced it will consider comprehensive tax reform and initiate proceedings with a blank slate: no exemptions, deductions, or credits.

According to NAHB, this could harm the bottom line of all residential construction businesses, depress home values, impose a tax increase on home owners, and cause massive layoffs in housing and other industries

Many of the tax reform proposals have suggested eliminating or reducing the mortgage interest deduction, the Low Income Housing Tax Credit, the capital gains exclusion for home sales and the deduction of property taxes, among others.

NAHB has issued a Call-To-Action to HBA members asking them to contact their Senators and tell them to preserve housing tax incentives like the mortgage interest deduction and low income housing tax credit.  To act and contact your Senators, click here.

NAHB's Top 12 Actions, Number 3: a comprehensive framework for housing finance reform

Builder Review Daily continues to highlight the Top 12 actions your HBA has taken on your behalf at the Federal level.

Number 3, release of a comprehensive framework for housing finance reform and active discussions with lawmakers:

Because our members’ businesses depend upon the existence of an accessible and reliable housing finance system, NAHB has been deeply engaged in policymakers’ conversations about how best to reform the system, wind down Fannie Mae and Freddie Mac, and ensure a stable supply of credit for both home buyers and rental housing. NAHB made a major contribution to this debate with the recent release of a comprehensive framework for housing finance reform that includes our specific recommendations.

Developed through a specially appointed NAHB working group and approved by NAHB's Board of Directors in Orlando, this plan stresses that any transition away from the current housing finance system must be done in a careful and deliberate manner to avoid further disruptions to an already fragile market. It is also built upon the recognition that, as the private market assumes a greater role in the marketplace, it is vital to maintain an appropriate level of government support to preserve financial stability, promote investor confidence and ensure liquidity/stability for homeownership and rental housing. In keeping with these core directives, NAHB's plan seeks to:

• Include private, federal and state sources of housing capital.
• Offer a reasonable menu of sound mortgage products for both single-family and multifamily housing that is governed by prudent underwriting standards and adequate oversight and regulation.
• Transition Fannie Mae and Freddie Mac to a new mortgage securitization system for single-family and multifamily conventional mortgages.
• Consider the 12 regional Federal Home Loan Banks for this securitization role.
• Phase in the new system over time and allow Fannie and Freddie to remain operational until the alternative system is fully functioning.
• Provide a federal backstop to ensure that conventional 30-year home loans and adjustable rate mortgages are available at reasonable interest rates and terms.
• Structure the federal support to the conventional mortgage market through a privately funded insurance fund similar to the FDIC’s backing of the fund that insures savings deposits. This will allow the government to be the insurer of last resort in order to reduce the risk to taxpayers.
• Continue role of federal housing agencies (HUD, FHA, VA, USDA, Ginnie Mae).
• Expand the role of the Federal Home Loan Banks in the housing finance system.
• Restart a carefully regulated fully private mortgage-backed securities market through reforms to the securities ratings system to remove conflicts of interest.
• Repair other flaws that produced the housing boom and bust by closing the gaps in standards and oversight that allowed and facilitated the improper and illegal activities in financial and mortgage markets.

NAHB believes this plan will produce a sound housing finance system that provides a stable and affordable supply of credit for home buyers and rental housing. Going forward, NAHB will be working with the Administration, Congress and policy stakeholders to make this goal a reality, and we have already begun to promote our plan among lawmakers and the media. Contact: Chellie Hamecs (800-368-5242 x8425).

NAHB: Home Builders Announce Housing Finance System Reform Plan

The National Association of Home Builders (NAHB) today announced a new comprehensive framework for housing finance system reform that would transition Fannie Mae and Freddie Mac to a new mortgage securitization system for single-family and multifamily conventional mortgages.

“Our plan seeks to overhaul the housing finance system to ensure that housing credit is available and affordable in the future and is delivered through a competitive, efficient, sound, safe and stable system,” said NAHB Chairman Barry Rutenberg, a home builder from Gainesville, Fla.

To achieve this goal, Rutenberg said the system must include private, federal and state sources of housing capital; offer a reasonable menu of sound mortgage products for both single-family and multifamily housing that is governed by prudent underwriting standards and adequate oversight and regulation; and provide a federal backstop to ensure that 30-year, fixed-rate mortgages are available at reasonable interest rates and terms.

Replacing Fannie Mae and Freddie Mac with a new securitization system for conventional mortgages backed by private capital and a privately funded federal mortgage-backed securities fund must be done in an orderly fashion over time. During this phase-in period, Fannie Mae and Freddie Mac would remain operational until the alternative system is fully functioning.

Under this scenario, Fannie Mae and Freddie Mac would be gradually replaced by private housing finance entities (HFEs) that would be chartered to purchase single-family and multifamily mortgages from loan originators and package the loans into securities for sale to investors worldwide. The federal government would guarantee the securities, not the mortgages.

The HFEs would only purchase mortgages that are well understood and have reasonable risk characteristics, such as standard 30-year fixed-rate loans. The HFEs would operate under the oversight of a strong independent regulatory agency to ensure all aspects of safety and soundness. NAHB believes the 12 regional Federal Home Loan Banks could serve as HFEs.

Federal support to the conventional mortgage of the future would consist of a privately funded insurance fund where the government would guarantee its solvency in a manner similar to the Federal Deposit Insurance Corporation’s backing of the fund that insures savings deposits. Under this system, mortgage originators would pay premiums to capitalize the insurance fund, which would cover losses and ensure full payment to investors. The federal government would be required to pay investors only if the insurance fund was depleted.

“The intent is for the government to be in a secondary position and to be the insurer of last resort in order to reduce the risk to taxpayers,” said Rutenberg.

NAHB’s housing finance reform blueprint also proposes to:

• Restart a carefully regulated fully private mortgage-backed securities system. NAHB believes reforms are needed in the system for rating mortgage-backed securities and is supporting the development of new securities ratings agencies that would use criteria developed by securities investors to assure objective evaluations and avoid conflicts of interest.

• Continue the role of the federal government housing agencies. The housing finance support roles of the Department of Housing and Urban Development, Federal Housing Administration, the Department of Veterans Affairs, the Department of Agriculture and the Government National Mortgage Association (Ginnie Mae) would be preserved.

• Enhance the position of state and local housing finance agencies (HFAs) as a source of housing funds. The HFAs should have a more prominent housing finance role through the development of original programs for new homes and multifamily rental units involving partnering with federal and private providers of housing capital.

• Expand the role of the Federal Home Loan Banks (FHLBanks) in the housing finance system. The FHLBanks should continue their current activities to serve as an ongoing liquidity source for institutions providing housing credit. Existing programs, such as the FHLBanks’ mortgage purchase programs, should be enhanced by allowing the banks to move beyond portfolio purchases to securitization.

• Repair flaws that produced the housing boom and bust. It is extremely important to continue and complete steps to close the gaps in standards and oversight that allowed and facilitated the improper and illegal activities in financial and mortgage markets. This should be done by undertaking a series of comprehensive reforms to ensure sound mortgage products and prudent underwriting; requiring sound mortgage securities structures and full transparency for investors; and imposing adequate oversight on previously unregulated segments of the mortgage and financial markets.