Is the FHFA planning to lower the conforming loan limit?

Could Bill Pulte's changes at the Federal Housing Finance Agency include slashing conforming loan limits? 

Christopher Whalen, chairman of Whalen Global Advisors and a contributing author to National Mortgage News, speculates cuts to the limit are coming. In separate posts to X, he claimed he received two confirmations of the move. The government-sponsored enterprises and their regulator are reeling from leadership changes and the GSEs are reportedly bracing for layoffs.

The FHFA on Monday said it had no comment. A CLL reduction has been floated before, most recently in a February Cato Institute publication the suggested cutting CLLs as part of winding down the conservatorship of the GSEs.

Policy experts who spoke to National Mortgage News Monday said they were unsure if the FHFA was pursuing the idea, or if it even had the power to reduce CLLs. But they agreed a hypothetical move would help to shrink the GSEs in line with an eventual privatization. 

"From a populist political standpoint it would make sense their footprint would be smaller, not bigger," said Eric Hagen, managing director at BTIG. "The easiest way for the GSEs to do that, the bluntest way for them to effect that change would be to lower the CLL."

Gray area

The FHFA uses its House Price Index to set conforming loan limits, as dictated by the Housing and Economic Recovery Act of 2008. The law's language states no annual adjustment shall be made if there is a decrease in the HPI, and that future adjustments shall take into account prior declines to produce a net change. 

"Declines in the house price index shall be accumulated and then reduce increases until subsequent increases exceed prior declines," the law reads.

The section however does not discuss if the FHFA can reduce the CLL for other reasons. 

Tobias Peter, a senior fellow at the American Enterprise Institute and co-director of the AEI Housing Center, in 2018 raised the idea of a shrinking CLL to wind down the GSEs. On Monday, Peter suggested the FHFA as a regulator couldn't change the CLL but as a conservator could. He pointed to the statute's language referring to powers pursuant to a safety and soundness law passed in 1992. 

"They might run into some pushback from various sources," said Peter of the hypothetical CLL reduction. "Congress can do this but FHFA as a conservator may have the power to do this as well." 

Potential aftershocks

A hypothetical cut to the CLL would boost the private-label securities market, and be a headwind for other mortgage players that rely more on the government for their business, said Hagen. A large lender will have financing channels for non-conforming loans, while non-originators like Annaly Capital Management and Redwood Trust would benefit. 

"Thinking constructively, it could be a positive if it leads to stronger returns and stronger margins as a result of this non-agency activity," said Hagen.

Outside of a hypothetical CLL cut, Peter mentioned other potential GSE winddown actions such as ending the backing of cash-out refinances or investor and secondary homes — a wishlist echoed by Whalen in a podcast Monday. Hagen said BTIG is also speculating the GSEs will charge higher guarantee-fees.

Pulte's plans

Norbert Michel, vice president and director of the Center for Monetary and Financial Alternatives at the Cato Institute, suggested the CLL idea was possible but not likely. He speculated that the limit wouldn't rise because of a slowing HPI. 

"If you want to reduce the importance of the GSEs, that's what you should do," said Michel. "But I don't think they can just unilaterally start doing that without a lot of effort."

The government has moved quickly to align with President Trump's agenda, targeting alleged fraud, waste and abuse and rescinding Biden-era policies. Pulte on Monday evening tweeted photographs of FHFA orders rescinding compliance with two directives. One rescinded a directive on multifamily lease policies related to tenant protections; another rescinded compliance with a recent bulletin urging compliance with Unfair or Deceptive Acts or Practices.

A Bloomberg Law report said the FHFA fired staff including those in fair lending and consumer protection roles, placing them last week on administrative leave.

Separately, U.S. Treasury Secretary in a podcast last week raised the possibility that the government's stakes in Fannie and Freddie could become part of a proposed U.S. sovereign wealth fund. One expert called the suggestion "baffling," but Hagen said it's indicative of the Trump administration's serious push toward privatization. 

"We feel like we can wake up tomorrow and there'll be an executive order that totally changes things," said Hagen. "We think the board changes only speak to more control and getting them closer to what they probably want to do."