[Federal Register Volume 73, Number 62 (Monday, March 31, 2008)]
[Pages 16895-16899]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-6560]



Office of Federal Housing Enterprise Oversight

Examination Guidance

AGENCY: Office of Federal Housing Enterprise Oversight, HUD.

ACTION: Notice of Final Examination Guidance--Conforming Loan Limit 
Calculations; Response to Comments.


SUMMARY: The Office of Federal Housing Enterprise Oversight is 
publishing today an Examination Guidance, ``Conforming Loan Limit 
Calculations,'' following two requests for public comment on a proposed 
examination guidance. Material in the guidance does not constitute a 

DATES: March 31, 2008.

FOR FURTHER INFORMATION CONTACT: If you have any questions regarding 
OFHEO's Examination Guidance--Conforming Loan Limit Calculations, you 
may contact Alfred M. Pollard, General Counsel, at (202) 414-3800 (not 
a toll free number). The telephone number for the Telecommunications 
Device for the Deaf is: (800) 877-8339 (TDD Only).

SUPPLEMENTARY INFORMATION: OFHEO's Examination Guidance on Conforming 
Loan Limit Calculations is posted on the Internet at http://www.ofheo.gov. This document, as well as all others mentioned in the 
preamble can also be accessed on business days between the hours of 10 
a.m. and 3 p.m., at the Office of Federal Housing Enterprise Oversight, 
Fourth Floor, 1700 G Street, NW., Washington, DC 20552. To make an 
appointment to inspect documents, please call the Office of General 
Counsel at (202) 414-6924.

I. Background and Statement on the Conforming Loan Limit for 2008

    On November 15, 2006, OFHEO announced that any decline in the house 
price index used to establish the conforming loan limit would not 
result in a decline in that limit for 2007. OFHEO also committed at 
that time, to providing updated guidance on how future reductions in 
the relevant house price index would affect the conforming loan limit.
    On June 20, 2007, OFHEO released on its Web site for public 
comment, a proposed revision to its existing Examination Guidance 
entitled ``Conforming Loan Limit Calculations'' (the original 
proposal). Subsequently, on October 22, 2007, OFHEO published in the 
Federal Register for public comment a revised version of that

[[Page 16896]]

proposed guidance (the revised proposal). Today, OFHEO is issuing the 
final Examination Guidance.

II. Comments Received on revised Examination Guidance--Conforming Loan 
Limit Calculations

    Calculations for the conforming loan limit establish the maximum 
size of loans that Fannie Mae and Freddie Mac may purchase, as provided 
in their charters. The conforming loan limit is adjusted annually 
through a calculation of year over year changes to the existing level 
of home prices based on data from the Federal Housing Finance Board's 
Monthly Interest Rate Survey (MIRS).
    A. Guidance Proposals. OFHEO provided for public comment on the 
proposed examination guidance through OFHEO's Web site on June 20, 
2007, and at the end of a thirty day comment period, some 23 comments 
from 25 organizations (representing over 2 million individuals and 
businesses) and individual comments were received. OFHEO took these 
comments into consideration, altered its proposed draft guidance and 
reissued it for further public comment on October 22, 2007. Central to 
OFHEO's consideration was assuring clarity in the process of 
calculating loan limits, providing for smooth market operations and 
affording certainty to those involved in making and securing mortgages-
Fannie Mae and Freddie Mac, mortgage originators, and homebuyers.
    The proposed guidances and the guidance made final today elaborate 
on, revise and supersede an existing guidance--Supervisory Guidance 
Conforming Loan Limit Calculations, SG-04-01 (February 20, 2004) that 
delineated OFHEO's role in calculating and announcing the conforming 
loan limit. In 2006, after a decline in housing price numbers, OFHEO 
announced that, while the conforming loan level had decreased, the 
resulting decline in the limit would be deferred a year. OFHEO also 
indicated it would revise and update the existing guidance and address 
how the decline would be implemented. OFHEO sought comment on all 
aspects of the guidance, noting certain key provisions addressing (1) 
whether and how existing conforming loans should be grandfathered; (2) 
a number of procedural matters, including rounding down announced loan 
limits to the nearest $100; and (3) needed clarity on treatment of 
declines in the conforming loan limit. As proposed, the calculated 
declines of less than one or, alternatively, three percent in the loan 
limit (currently $417,000) would be deferred. Once cumulative deferrals 
reached one or, alternatively, three percent, then the total decline 
would be subtracted one year later from the calculated conforming loan 
limit after adjusting for any subsequent price increase that had 
occurred. Additional information on OFHEO's original and revised 
guidance proposals remain on OFHEO's Web site.
    B. Comments Received. OFHEO received comments from seven 
commentators to its Revised Draft Examination Guidance for calculating 
the conforming loan limit (CLL), proposed on October 22, 2007. Four 
housing and mortgage industry trade associations commented, 
specifically, the National Association of Realtors (NAR), the Mortgage 
Bankers Association of America (MBA), the National Association of 
Homebuilders (NAHB), and a joint comment letter from the American 
Bankers Association and America's Community Bankers (ABA/ACB). Jeff 
Butchko, a private citizen, submitted a comment letter. Both Freddie 
Mac and Fannie Mae submitted comment letters.
    1. Industry Trade Associations. The NAHB, the NAR, and the MBA 
reiterated that OFHEO does not have statutory power to reduce the 
conforming loan limit. The NAHB, NAR, and the MBA asserted that the 
draft guidance was bad public policy and introduced a complicated 
calculation method that would distort markets. Additionally, both the 
MBA and NAHB repeated concerns that the proposed guidance was a 
regulation under the Administrative Procedure Act and it must be issued 
in accordance with the requirements of that Act, whereby the APA 
promulgation would be subject to judicial review. Central to their 
argument was that, for operational and other reasons, the conforming 
loan limit should not decline.
    The MBA requested further expansion of the ``grandfathering'' 
provision due to a decline in the loan limit post-commitment but prior 
to closing. The NAR, however, stated that despite their statutory 
authority and public policy concerns, they would support the 3 percent 
de minimis threshold, the deferral of reductions for at least one year, 
and the grandfathering of mortgages approved under higher conforming 
loan limits. Both the MBA and NAHB resubmitted their previous comment 
letters to support their criticism of the draft Guidance.
    The ABA/ACB, in a joint comment, expressed support of OFHEO's 
proposed guidance. They stated that the revised guidance addressed 
their general concern on ``grandfathering'' issues, and they welcomed 
the de minimis change from one percent to three percent in the revised 
    Mr. Jeff Butchko's comment letter (e-mail) stated that the 
conforming loan limit is too low for many areas of the country and 
requested that OFHEO raise this limit.
    2. Enterprise Comments. Fannie Mae offered comments on the 
grandfather rule, questioning whether language in the draft guidance 
grandfathering loans that were conforming at origination matched the 
language in the preamble. They expressed a concern that this difference 
in language could be disruptive to the market. Fannie Mae further 
argued that the mechanism to provide for decreases in the conforming 
loan limit had no long-term significance and ``potential harmful'' 
short-term effects. They stated that the ``question for OFHEO may be 
not whether it has statutory authority to enforce a `negative increase' 
in the CLL but whether the statute requires this result; not whether it 
can reduce the CLL temporarily but whether it should.''
    Freddie Mac had specific comments to multiple elements of the 
revised guidance. Freddie Mac recommended that any decrease in the MIRS 
should be offset against future increases, rather than reducing the 
CLL. If OFHEO decided to require a de minimis threshold for a decrease, 
the proposed three percent threshold should be raised to five percent. 
Like Fannie Mae, Freddie Mac recommended that the grandfathering 
language in the preamble be adopted in the body of the guidance. 
Finally, Freddie Mac recommended removing the rounding provision 
altogether. If OFHEO chose to retain the rounding provision, Freddie 
requested that OFHEO retain its current practice of rounding down to 
the nearest $50.
    The final examination guidance on conforming loan limit 
calculations, which OFHEO has determined to revise and issue, is set 
forth below.


Office of Federal Housing Enterprise Oversight

Examination Guidance

Issuance Date: March 31, 2008. Doc. : EG-08-001
Subject: Conforming Loan Limit Calculations
To: OFHEO Examiners
OFHEO Associate Directors

Table of Contents

I. Introduction
    a. Scope
    b. Preservation of Existing Authority
II. Calculation of Conforming Loan Limit
    a. General Procedures

[[Page 16897]]

    b. Procedures for Years in Which Limit Declines
    c. Procedures for Adjustments and Technical Changes
    a. Supervisory Guidance SG-04-001
    b. Federal Housing Enterprises Financial Safety and Soundness 
    c. OFHEO Regulations Safety and Soundness Standards, 12 CFR part 
1720 & Prompt Supervisory Response & Corrective Act, 12 CFR part 

I. Introduction

a. Scope

    This guidance addresses the annual establishment of the conforming 
loan limit amount for mortgages purchased by Fannie Mae and Freddie Mac 
(``the Enterprises'') and OFHEO supervisory procedures related to such 
    This guidance replaces Supervisory Guidance SG-04-01.
(1) OFHEO Supervisory Authority
    OFHEO oversees two housing government sponsored enterprises-- 
Fannie Mae and Freddie Mac--to assure they operate in a safe and sound 
manner and maintain adequate capital; 12 U.S.C. 4501, 4511, 4513. 
OFHEO's responsibilities include avoiding situations that would present 
safety and soundness problems; 12 CFR part 1720, Appendices A and B and 
12 CFR part 1777. In addressing areas where such problems could arise, 
OFHEO has highlighted corporate governance and financial disclosures; 
12 CFR parts 1730 and 1710. In its regulation on disclosure, OFHEO 
noted key areas of concern--access to markets and potential damages to 
the firms from incurring reputation risk. Therefore, OFHEO has set 
forth this guidance to ensure that the conforming loan limit is 
established in a manner consistent with safe and sound operations and 
with statutory requirements.
    For twenty-five years of practice, the Enterprises announced a 
conforming loan limit. However, in seven of those years adjustments or 
decisions were made that raised safety and soundness concerns about the 
annual adjustment to the conforming loan limit. OFHEO believes that the 
situation may be addressed through appropriate guidance, setting a more 
regularized process of oversight and control for this matter of 
national significance. That is the intent of this guidance.
(2) Conforming Loan Limit (CLL)
    The Enterprises are authorized by their charters to purchase 
mortgages up to a specified limit as adjusted annually; 12 U.S.C. 
302(b)(2) and 305(a)(2). This limit is referred to as the conforming 
loan limit (CLL).
    The Enterprises make this adjustment based on a survey conducted by 
the Federal Housing Finance Board (FHFB). The FHFB monthly conducts and 
publishes the results of a survey of mortgage interest rates, the 
Monthly Interest Rate Survey (MIRS). Under the Enterprise charters, the 
change in the national average one-family house price during the 
twelve-month period ending with the previous October as determined by 
the FHFB in its survey is the basis for changes to the conforming loan 
limit. The Enterprises apply the percentage change to the current 
year's conforming loan limit to establish the next year's limit. This 
number constitutes part of the determinations of the eligibility of 
loans for Enterprise purchases.
    OFHEO as safety and soundness regulator has responsibility to 
oversee safe and sound operations and may act to redress violations of 
law by the Enterprises. In the case of the conforming loan limits, 
OFHEO determined in 2004, following a problem in technical matters 
relating to the limits, that a more formalized process for establishing 
the conforming loan limit was needed.
(3) Background to Conforming Loan Limit Determinations
    Since 1981, the Enterprises have adjusted the conforming loan limit 
as allowed under the Housing and Community Development Act of 1980. 
During this time frame, two types of occurrences have transpired that 
raise the need for a more formal process: (1) The Enterprises on some 
occasions adjusted their loan limits in a manner that was different 
from the survey results and (2) the Federal Housing Finance Board has 
made technical changes to its methodology for determining housing 
prices that the Enterprises have not reflected in their adjustments.
    On three occasions prior to 2006, the average house price declined 
from October to October (in 1989, 1993, and 1994). In November 1989, 
the Enterprises reduced the 1990 conforming loan limit by $150 from the 
1989 level based on a house price decline of 0.07 percent. In November 
1993 and November 1994, however, the Enterprises announced that the 
conforming loan limit would remain constant at $203,150, despite 
declines in house prices of 2.96 percent in 1993 and 1.46 percent in 
1994. After housing prices increased from October 1994 to October 1995, 
the Enterprises raised the limit for 1996 without any adjustment for 
the previous declines.
    Additionally, in November 1997, the Enterprises took another 
course, setting a lower number than the adjustment produced. They 
determined that the 1998 conforming loan limit would increase by only 
3.67 percent, even though the percentage change in house prices using 
FHFB data for 1996-1997 was 8.44 percent. The practical effect of this 
action was to adjust retroactively for the 1993 and 1994 price 
    There have been three occasions--in 1992, 1998 and 2003--when the 
Federal Housing Finance Board made methodological changes to the 
Monthly Mortgage Interest Rate Survey that required an adjustment to 
one or both of the reference years, that is, the prior or current 
year's October calculation (in 1992, 1998, and 2003). In December 1992, 
the Enterprises determined that the 1993 conforming loan limit would 
increase 0.42 percent based on adjusted FHFB numbers for October 1991 
and October 1992 national average one-family house price. In November 
1998, the Enterprises determined that the 1999 conforming mortgage loan 
limit would increase by 5.66 percent based on an adjusted October 1997 
house price survey. Therefore, in 1992 and again in 1998, the 
Enterprises used the adjusted national average one-family house 
price(s) provided by the FHFB.
    In 2003, however, the Enterprises adopted a conforming loan limit 
that disregarded communications from the FHFB staff regarding a change 
in the methodology for estimating house prices. The Enterprises 
determined that the 2004 conforming loan limit would increase by 3.41 
percent based on unadjusted national average house prices for October 
2002 and October 2003. However, FHFB staff had indicated that the 
October 2003 national average house price should be adjusted downward 
by $1,647, resulting in a net increase of 2.71 percent.
    Due to this inconsistent application of procedures for price 
declines and methodology changes, OFHEO issued a conforming loan limit 
guidance in 2004. To clarify elements of the existing guidance and to 
address the concerns around possible declines in the national average 
house price average, OFHEO announced in late 2006 that it would issue a 
new guidance to replace the 2004 issuance.
    In 2006, the October national house price average declined by 0.16 
percent from the previous October, which by the standard calculation 
would have reduced the maximum single family conforming loan limit from 
$417,000 to $416,300. OFHEO had previously indicated, however, that the 
effect of any decrease in the house price average

[[Page 16898]]

would be deferred until the Fall 2007 calculation of the limits for the 
following year. OFHEO also stated that for the 2008 calculation, the 
decrease of 0.16 percent would be deducted from any increase in the 
average house price in the year ended October 2007 or, if the average 
price decreased, the loan limit would decrease by that 0.16 percent 
amount. OFHEO subsequently announced that in line with its approach in 
proposed guidances, the conforming loan limit would not decrease in 
2008. Left to be determined was how a further decline in 2008, if it 
occurred, would be treated and whether any existing loans would be 
grandfathered. The purpose of this guidance, which was subject to 
public notice and comment on two occasions is to address these and 
related issues.

b. Preservation of Existing Authority

    Nothing contained in this guidance prevents OFHEO from undertaking 
such supervisory or enforcement actions as may be necessary to meet its 
statutory obligations to oversee maintenance of safety and soundness 
and adequate capital.

II. Calculation of Conforming Loan Limit

a. General Procedures

    (i) Consistent with statute, OFHEO will utilize the Federal Housing 
Finance Board's annual October-to-October Monthly Interest Rate Survey 
(MIRS) data (routinely released in November) to calculate the 
conforming loan limit for the following calendar year.
    (ii) Under the terms of an inter-agency agreement, the FHFB will 
provide OFHEO with the confidential October survey data prior to its 
public release.
    (iii) OFHEO will calculate the percentage change in the average 
house price, make any adjustment needed to reflect FHFB methodological 
changes and determine the new maximum conforming loan limit for the 
following year. The result of the calculation will be rounded downward, 
in line with existing practice, to the nearest $100, for marketplace 
convenience and administrative simplicity.
    (iv) Immediately following the FHFB's October MIRS announcement, 
OFHEO will announce the maximum level of the new conforming loan limit 
and simultaneously issue a letter with its determination to each 
    (v) Each Enterprise under its charter then determines whether to 
set the conforming loan limit at its institution at or below that 
    (vi) The purchase of any mortgage above the limit by Fannie Mae or 
Freddie Mac will be considered an unsafe and unsound practice, running 
contrary to statute.

b. Procedures for Years in Which the House Price Level Declines

    (i) If the October MIRS survey data indicate a decline from the 
previous October, no decrease in the loan limit for the next year will 
be required.
    (ii) The next increase in the conforming loan limit will take into 
account prior decline(s) in the MIRS so that an increase in the loan 
limit will reflect the net change in the MIRS average price since the 
last loan limit increase. Declines will be accumulated and then reduce 
increases until increases exceed such prior declines.

c. Procedures for Adjustments and Technical Changes

    (i) At any time during the year after a calculation has been made 
and the conforming loan limit set, if the FHFB revises the MIRS or any 
calculation, the Enterprises may provide comments to the FHFB for its 
consideration. Copies of any Enterprise comments should be provided 
contemporaneously to OFHEO.
    (ii) Once the FHFB has determined the nature, scope and timing of 
technical changes or adjustments, OFHEO will make adjustments to the 
next year's conforming loan limit based upon the procedures set forth 
in this Guidance.

III. Changes to the Conforming Loan Limit Guidance

    After careful consideration of comments received and seeking to 
meet the goals of clarity, ease of implementation, providing market 
certainty and in light of the temporary increase in the conforming loan 
limit contained in the Recovery Rebates and Economic Stimulus for the 
American People Act of 2008, OFHEO has revised and is issuing a final 
Examination Guidance--Conforming Loan Limit Calculations. Regarding the 
central topic of most comments and for which differing comments were 
received, OFHEO has determined that any October-to-October decrease in 
the national average house price, as reported by the Federal Housing 
Finance Board's MIRS, will not require a decrease in the loan limit but 
will be charged against the next increase or increases, as necessary. 
Any percentage increase in the loan limit will not exceed the net 
percentage increase in the MIRS average price since October of the year 
preceding the last increase in the loan limit. In sum, the loan limit 
will not decline from the present $417,000 level; however, calculated 
decreases will be accumulated and offset increases until all of the 
accumulated amounts have been offset. This will ensure that the 
conforming loan limit remains, as contemplated, a measure tied to 
housing prices. Over time, both increases and decreases will be 
reflected in the limit. This also means that the de minimis and 
grandfathering proposals are no longer relevant.
    Other elements of the draft guidance have been adopted as proposed. 
OFHEO reconsidered whether it should round the maximum permitted loan 
limit to the nearest $100, as proposed, or whether it should retain the 
current practice of rounding to the nearest $50. In view of the 
quadrupling of house prices generally since adoption of the $50 figure, 
OFHEO determined to adopt the $100 rounding factor as proposed. Below 
is a summary of key provisions and additions or deletions made in the 
guidance issued today.

A. Loan Limit Declines and Statute

    Some comments received agreed with OFHEO's determination to address 
declines in home price levels, while others disagreed. OFHEO's view 
remains the same--that declines fit within the statutory language as 
``negative increases.'' In the alternative, where statutory language is 
silent, as is the case here, regulators routinely fill gaps in statutes 
with rational solutions in line with available statutory intent. Since 
loan limit calculations are tied to annual home price surveys, 
increases and declines reasonably may be considered in line with that 
statutory structure.

B. Loan Limit Declines--Deferrals

    In line with a streamlined approach adopted herein, OFHEO has 
extended the deferral period. Decreases will be accumulated and then 
applied to the next following increase in the loan level. They are not 
deferred for a set period but accumulated until an increase occurs and 
are then applied to offset increases until increases exceed accumulated 

C. Loan Limit Declines--De Minimis Declines

    In line with a streamlined approach adopted herein, OFHEO has 
dropped language regarding de minimis declines. Since the conforming 
loan limit does not decline, but rather increases in the limit may be 
reduced by prior declines, there are no operational concerns, as were 
identified in the comment period, regarding offsetting increases with 
reductions or not making increases

[[Page 16899]]

where deferred amounts offset any increase.

D. Grandfathering Issues

    In line with the streamlined approach adopted herein, OFHEO has 
dropped language on grandfathering. Since the conforming loan limit 
does not decline, no concerns exist about loans made prior to a decline 
in the loan limit.

E. Rounding Down

    Comments received regarding a rounding down to the lowest $100 as 
opposed to the current OFHEO practice of rounding down to the lowest 
$50 were mixed with some opposing and others indicating either no 
objection to or no opinion on OFHEO's proposal. The final guidance 
adopts the approach of rounding down to the nearest $100 as having 
value as to market and consumer simplicity and understanding. Also, it 
would represent a doubling of this rounding standard, a much smaller 
percentage change than the four-fold increase in the loan limits since 
the $50 standard was adopted.
    Accordingly, as stated in the Preamble, OFHEO hereby publishes the 
text of its Final Examination Guidance on Conforming Loan Limit 

     Dated: March 25, 2008.
James B. Lockhart, III,
Director, Office of Federal Housing Enterprise Oversight.
[FR Doc. E8-6560 Filed 3-28-08; 8:45 am]