The Federal Housing Finance Agency (FHFA) has kept national conforming loan limits steady for 2015 and increased it in 46 high-cost U.S. counties and 10 metropolitan statistical areas (MSAs) including San Diego, Denver, Nashville, Baltimore, and Seattle. Even though the increases were small and somewhat spread out, this still highlights the change in approach since Mel Watt took over earlier this year.
“In the cities where FHFA raised loan limits, we view the changes as incrementally positive because conforming loans typically require a lower down payment in percentage terms versus jumbo loans, and if FHA loan limits are increased in certain areas, we would view that as an incremental demand catalyst,” write Sterne Agee Jay McCanless and Annie Worthman.
Avoid exposure to first-time homebuyers: Sterne Agee
McCanless and Worthman estimate that 90% of US mortgages are either bought by Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) or insured by the Federal Housing Administration (FHA), with most of the other 10% being jumbo loans that are too big to qualify and require much larger down payments because of it. Any increase to the conforming loan limit would make marginal cases a lot more attractive since the required down payment can drop as much as 20% to 3.5%. Even so, this change in direction isn’t enough for the Sterne Agee analysts to change their overall assessment of the market.
“We encourage clients to focus on Buy-rated names including PulteGroup, Inc. (NYSE:PHM) (BUY, $23 PT), Ryland Group Inc (NYSE:RYL) (Buy, $45 PT), Meritage Homes Corp (NYSE:MTH) (Buy, $42 PT), and WCI Communities Inc (NYSE:WCIC) (Buy, $21 PT) because we anticipate these companies have the least exposure to first-time buyers in our coverage and because these companies’ strategies are not predicated on a widening of the mortgage credit box,” they write.
FHA announcement expected soon
The next thing to look out for is the FHA announcement for its 2015 loan limits, which should come out in the next couple of weeks. Last year FHA cut loan limits in some markets by as much as a quarter, but McCanless and Worthman think the FHA could even increase loan limits this year, providing another small boost to the market. Like the FHFA announcement, the incremental increase in demand would be less significant than the shift to a more business friendly approach at FHA.