A Canary in the Mortgage Market? Why the recent FHA and GSE loan limit reductions deserve attention

On October 1, 2011, the maximum loan size eligible for Federal Housing Administration (FHA) insurance or a guarantee from Fannie Mae or Freddie Mac (known as "Government-Sponsored Enterprises" or "GSEs") dropped in dozens of metropolitan areas around the country. When this change took effect, a segment of the mortgage market in each of these areas instantly lost some or all federal backing. If enough borrowers seeking loans in this segment are unable to find financing, the result will be further downward pressure on the corresponding segment of the housing market. In this report, we use recent mortgage origination data to explore some of the possible implications of this policy change for the housing market and the U.S. mortgage finance system.