	Background

Until they were placed under government conservatorship in September 2008, Fannie Mae and Freddie Mac were stockholder-controlled companies that were chartered by Congress to improve the nation's residential mortgage market and are known as government-sponsored enterprises (GSEs). Congress enacted the modern conforming loan limit, which establishes the maximum size mortgage that the GSEs can purchase, in the Housing and Community Development Act of 1980. Since 2006, the basic conforming loan limit has held steady at $417,000. In 2008, the passage of the Economic Stimulus Act of 2008 (ESA; P.L. With the expiration of the Continuing Appropriations Act of 2011, the conforming loan limit in high-cost areas is determined by the Housing and Economic Recovery Act of 2008 ( P.L. 110-289 ): 115% of area median house price, but not to exceed 150% of the national conforming loan limit, which results in a high-cost limit of $625,500. In other areas, the FHA mortgage limit was and is 65% of the national conforming loan limit or $271,050. According to recent congressional testimony, most recent home purchase mortgages are guaranteed by FHA and securitized by Ginnie Mae; the majority of mortgages purchased recently by Fannie Mae and Freddie Mac have refinanced existing mortgages. Under HERA, the conforming loan limit for those areas was 115% of the median home price in the area, except that increases were to be capped at 150% of the statutory loan limit (the limit that now applies to Alaska, Hawaii, and the two island territories). ARRA returned the conforming loan limits for mortgages originated in 2009 in high-cost areas to the 2008 ESA limit, that is, the high-cost limit was set at 175% of the statutory limit or $729,750. GSE status allows Fannie and Freddie to borrow at lower interest rates than non-GSE financial institutions. A portion of this subsidy is passed on to home buyers whose mortgage loans are purchased and securitized by the GSEs. Credit conditions in the jumbo market are said to be unusually tight—the spread between jumbo and conforming loan rates has widened. Allowing the GSEs to securitize some jumbo loans restored liquidity to the part of the secondary market covered by the higher limits, enabled lenders to transfer the risk of holding jumbo mortgages, and made loans more affordable and available. Home buyers in the conforming mortgage market may receive part of the GSE subsidy in the form of lower interest rates. The ultimate cost to taxpayers of this intervention is unknown.
Congress is concerned with the pace of the recovery in the housing and mortgage markets. A series of laws starting with the Economic Stimulus Act of 2008 (ESA; P.L. 110-185) were designed to increase the availability and affordability of mortgages in "high-cost" areas. This concern about housing and mortgage markets is balanced by attention being paid to possible taxpayer financial risks and the desire to minimize government intervention in economic markets.
Two congressionally chartered government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, provide liquidity to the mortgage market by purchasing residential mortgages from the original lenders and either reselling them as mortgage-backed securities to investors or holding them as investments in their own portfolios. Their charters include a ceiling on the size of loans the GSEs can buy.
Since the end of FY2011 (September 30, 2011), the maximum limit in high-cost areas was reduced to $625,500 from $729,750. The current high-cost limit is calculated as 115% of the area median house price, but cannot exceed 150% of the national limit or $625,500. The limit in other areas of the nation remains unchanged since 2006 at $417,000.
Securitization of mortgages that exceed the applicable limit—called non-conforming jumbo loans—is done by private financial institutions, although in the present financial environment virtually no jumbo mortgages are being securitized. GSE status allows Fannie and Freddie to issue debt at lower cost than other private firms; part of this subsidy is passed on to home buyers in the form of lower interest rates. Interest rates on jumbo mortgages are slightly higher than those on the conforming loans that the GSEs can purchase. The spread between non-conforming jumbo and conforming loan rates has been elevated since the start of the financial crisis and is now about three-fourths of 1%.
According to recent congressional testimony, most recent home purchase mortgages are guaranteed by FHA and securitized by Ginnie Mae; the majority of mortgages purchased recently by Fannie Mae and Freddie Mac have refinanced existing mortgages.
S. 1217, the Housing Finance Reform and Taxpayer Protection Act of 2013, would reduce the maximum high-cost limit from 150% of the national limit ($625,500) to 130% of the national limit ($542,100). H.R. 2767, the Protecting American Taxpayers and Homeowners (PATH) Act of 2013, could reduce the high-cost limit to $525,500.
This report analyzes the implications of the higher conforming loan limit in high-cost areas. It will be updated as legislative and market developments warrant.