A scheduled reduction in mortgage limits on government-backed loans could make about 1.4 million U.S. home ineligible for the most affordable and accessible types of mortgages, according to the National Association of Home Builders (NAHB).

A new study from the NAHB reports that an Oct. 1 decrease in the maximum loan limit for Fannie Mae, Freddie Mac and FHA mortgages will likely mean that homebuyers in high-cost areas will have to pay higher interest rates and down payments, and need higher credit scores, to obtain a mortgage. That could put a crimp in several major housing markets that are struggling to recover from the economic downturn.

The current conforming loan limit for Fannie Mae, Freddie Mac and FHA loans is scheduled to decline to a maximum of $625,500 on October 1, down from the current $729,750. Those limits apply only to the more expensive real estate markets in the country; the conforming limit for most parts of the country is and will remain at $417,000.

"The lower limits will place a constraint on home buying in high-cost housing markets, such as those along the coasts and in California," said Bob Nielsen, NAHB chair. "It is the last thing we need in a housing market that is still struggling to get back on its feet."

The NAHB said sales of lower-priced homes could be affected as well, because of indirect impacts on trade-up sales and first-time home buyers.

The change will likely drive up interest rates on loans that no longer qualify for Fannie Mae or Freddie Mac backing by 0.6 percentage points, according to the NAHB, and 0.5 percentage points over an FHA loan. Though Fannie Mae and Freddie Mac are technically private entities, they have been under government conservatorship since late 2008.

Prior to 2008, the maximum loan amount any homebuyer could get on a mortgage backed by Fannie Mae, Freddie Mac or the FHA was $417,000, the standard conforming loan limit. But in response to the growing housing crisis, Congress temporarily raised the limit in certain areas to support sales of the higher-end homes that dominate those markets.

The current formula for conforming mortgage loan limits in high-priced areas is 125 percent of the median price in a given market; that is scheduled to decline to 115 percent Oct. 1.

The reduction in loan limits will affect only 6.5 percent of all U.S. counties. However, those tend to be high-density areas that contain 27 percent of the total U.S. owner-occupied housing stock, according to the NAHB.

It's unlikely that the higher limits will be extended past the current Oct. 1 deadline, given the preference expressed by both congressional leaders and the administration for diminishing the role of Fannie Mae, Freddie Mac and the FHA in mortgage markets in favor of private lenders.

Published on August 3, 2015