Housing Finance:

Implications of Alternative Methods of Adjusting the Conforming Loan Limit

RCED-95-6: Published: Oct 5, 1994. Publicly Released: Oct 5, 1994.

Additional Materials:


Judy A. England Joseph
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Pursuant to a legislative requirement, GAO reviewed the methodology that the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) uses to adjust the conforming loan limit, focusing on: (1) the effect of using alternative adjustment methods on the loan limit; (2) the implications of Fannie Mae's and Freddie Mac's decision to maintain the 1993 loan limit for 1994; and (3) how data users view the accuracy of the Finance Board's price data.

GAO found that: (1) using alternative methods for adjusting the mortgage loan limit would not have substantially changed the 1993 loan limit or the share of the conventional mortgage market that would fall within the conforming loan limit; (2) of the four alternatives tested, three did not change the loan limit by more than 7 percent of the 1993 limit; (3) the alternative adjustment method that used actual home prices as its basis changed the loan limit by more than 14 percent; (4) 93 percent of all conventional loans were at or below the actual conforming limit in 1993; (5) the decision to maintain the 1993 loan limit in 1994 is legislatively authorized, should allow both companies to serve the same share of the mortgage market, and should ease potential disruption to lenders; (6) maintaining the 1993 conforming loan limit may lower some borrowers' interest rates; (7) the 1995 loan limit may be adjusted upward because the legislation requires that adjustments be made annually; (8) an upwardly biased loan limit could lower some borrowers' interest rates, increase the number of loans available for purchase, decrease the number of jumbo loans, and affect Federal Housing Administration (FHA) loan limits if FHA loan limits are indexed to the conforming loan limit; (9) most data users find the Finance Board's data to be generally accurate; and (10) the Finance Board is the only comprehensive source of national data on housing price changes for new and existing homes.

Matter for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: This issue has not been raised in Congress and GAO knows of no future plans.

    Matter: If Congress intends that the conforming loan limit follow the long-term pattern of growth in average home prices, it should amend the legislation to require that adjustments be made on the basis of the time period since the limit had last been changed rather than the 12-month period preceding the adjustment, as currently mandated.


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