Fannie Mae and Freddie Mac may be forced to support $1 million loans due to rising housing prices.
Home prices have skyrocketed across the country in the last year, as demand for homes has soared and inventory has plummeted.
However, increased costs are anticipated to push conforming loan limits to what analysts predict will be record highs in 2022, with the maximum loan limit in high-cost areas reaching over $1 million. The Wall Street Journal revealed the projected increases on Tuesday, and industry journals have predicted the changes as well.
Non-conforming or “jumbo” mortgages are those that exceed the “conforming” loan restrictions set by federal mortgage giants Fannie Mae and Freddie Mac and come with higher interest rates.
According to Melissa Cohn, Regional Vice President at William Raveis Mortgage, “the increase is wonderful news for homebuyers, especially those in high-cost locations who were being pushed into a jumbo mortgage even for a modest property.” “Having a conforming loan has so many advantages that raising the loan limits will be tremendous.”
However, other economists are concerned that raising the cap to over $1 million will mean the government is intervening too much in the housing market.
What are conforming loan limits?
Freddie Mac and Fannie Mae, which together back approximately half of all mortgages in the United States, are not lenders; instead, they buy loans from lenders and sell them to investors. This lowers the cost of the loans for lenders, allowing them to offer reduced interest rates and other benefits to consumers.
More homebuyers can qualify for loans that are normally less expensive, need smaller down payments, and accept lower credit scores by classifying higher-balance loans as conforming. Because of the additional risk, jumbo loans are more expensive and difficult to qualify for.
The new conforming loan limitations are likely to be announced by the Federal Housing Finance Agency, which regulates the two mortgage behemoths, by the end of November. However, the method for raising the limitations each year considers how much property values have risen throughout the year, which has been significant in 2021.
The current maximum conforming loan amount is $548,250. In high-cost cities like San Francisco and Silicon Valley, New York City and the suburban counties around it, and Washington, DC, and its surrounding suburbs, the maximum conforming loan amount is $822,375. There are around 100 counties in the United States that fulfill the maximum cost criteria when the local median house value exceeds the baseline conforming loan limit by 115 percent.
Every year, conforming loan ceilings are updated to reflect changes in the average price of a home in the United States. The maximum loan limit in high-cost locations is calculated as a multiple of the median house value in the area, up to a maximum of 150 percent of the baseline loan limit.
According to the FHFA House Price Index, home prices climbed 7.42 percent on average between the third quarter of 2019 and 2020. As a result, the maximum conforming loan ceiling will increase by the same amount in 2021. However, property prices are likely to rise significantly this year.
According to the most recent data from the FHFA’s House Price Index, prices were up 18.5 percent from a year ago in August. According to that metric, the conforming loan maximum in most high-cost areas would be around $650,000, while the loan limit in select high-cost places would be around $975,000. However, no specifics have been released.
Some lenders are already making changes in advance of the announcement, such as United Wholesale Mortgage and Homebridge Wholesale, who are raising the maximum conforming house loan limit to $625,000.
‘It is a big bump’
According to the National Association of Realtors, the median price of a home in the third quarter was $363,700, up 16 percent from a year ago. In the third quarter, home prices increased in virtually all — 99 percent — of the 183 markets tracked by NAR, with double-digit price gains in 78 percent of the markets.
Many home buyers have found it more difficult to finance their purchases as a result of these price increases. While Freddie Mac and Fannie Mae have widened the mortgage underwriting process for first-time homeowners by including rental payments in the credit review process, the new loan ceilings will benefit many other homebuyers, according to Cohn.
“It’s a significant bump,” Cohn explained. “However, it would make conforming loans available to a large number of people who previously did not have access.” Many folks in New York City have never had the chance to take advantage of conforming loan benefits.”
Conforming loans allow for a higher debt-to-income ratio, parents as cosigners, and other benefits in addition to requiring a lesser down payment and lower credit ratings.
Conforming loans also give self-employed borrowers additional flexibility in terms of income requirements.
“This will be especially important next year for the many people who were self-employed during the pandemic and had their income restored in 2021,” Cohn added. “They can acquire a waiver to merely give the most recent year’s tax return if they wish to buy in 2022.”
Concerns about the loan limits
However, not everyone is pleased with the predicted increase in conforming loan limits.
“As we get closer to a $1 million loan cap, Congress and the administration need to think hard about how much government support the mortgage market should receive,” said Ed DeMarco, president of the Housing Policy Council, an industry group focusing on housing finance.
He claims that growing loan restrictions allow taxpayers to finance mortgages for higher-income households because housing values are rising faster than incomes.
“Mortgage securities backed by taxpayers result in slightly lower mortgage rates,” he explained. “This encourages individuals to buy more costly homes and feeds the price increase, worsening the affordability issues we confront in today’s supply-constrained market.”
While the loan limits are automatically increased based on a formula, the FHFA has the authority to implement a smaller increase, or even to freeze or reduce the ceiling, according to DeMarco.
“Providing government-backed funding for such mortgages drives up housing prices and crowds out private financing,” he said.