High house prices could push Fannie Mae and Freddie Mac to back loans of nearly $ 1 million


And those higher prices have prompted mortgage giants Fannie Mae and Freddie Mac to raise limits on government guaranteed loans to an all-time high for 2022, with a maximum loan limit of nearly $ 1 million for the zones. at high cost.

As a result, the benchmark compliant loan limit for 2022 will be $ 647,200, up almost $ 100,000 from last year’s limit. Higher cost areas will have a new loan limit of $ 970,800, or 150% of the base loan limit.

The increase, up $ 98,950 from $ 548,250 in 2021, is the largest percentage and dollar increase in the measure’s history dating back to 1980.

Mortgages above these loan limits are considered “non-conforming” or “jumbo” mortgages and generally carry higher interest rates.

The increase is great news for homebuyers, especially those in high cost areas who have been pressured into taking out a jumbo mortgage even for a modest home, said Melissa Cohn, regional vice president of William Raveis Mortgage. “There are so many benefits to having a compliant loan that the increase in loan limits will be huge. “

But some analysts fear that raising the limits to nearly $ 1 million may mean the government is playing too big a role in supporting high house prices.

What are the compliant loan limits?

Freddie Mac and Fannie Mae, who back about half of all US mortgages, aren’t lenders, but they buy loans from lenders and sell them to investors. This makes these loans cheaper for the lenders, which usually causes them to offer consumers lower interest rates, among other benefits.

By categorizing loans with the highest balances as compliant, more buyers can qualify for loans that are generally cheaper, require smaller down payments, and allow for lower credit scores. Jumbo loans are more expensive and more difficult to obtain due to the higher risk involved.

The FHFA’s formula for increasing limits each year takes into account the increase in house prices during the year. The law sets the maximum loan limit in high cost areas as a multiple of the median house value in the area, up to a maximum of 150% of the benchmark loan limit.

For 2021, the maximum basic compliant loan amount is $ 548,250. This goes up to a maximum amount of $ 822,375 in high-cost areas like San Francisco and Silicon Valley, as well as New York and Washington, DC, and surrounding suburbs of cities. Of the 3,000 counties in the United States, there are about 100 that hit the highest cost threshold, where 115% of the home’s local median value exceeds the basic conforming loan limit.

The annual adjustment is based on an expanded data FHFA house price index, a version of the index that includes a larger data set. Last year, house prices rose 7.42% on average between the third quarters of 2019 and the third quarter of 2020, according to the index. As a result, the maximum compliant benchmark loan limit in 2021 has increased by the same amount. But this year, house prices have gone up a lot more.

The seasonally adjusted and broadened nominal FHFA home price index saw house prices increase by 18.05% on average (a number slightly lower than that of the flagship buy-only index which was 18.5%). %) between the third quarters of 2020 and 2021, therefore the loan limit in line with the baseline has been increased by the same amount.

Some lenders have anticipated the announcement and have already adjusted their offering, including United Wholesale Mortgage and Homebridge Wholesale, which increased their maximum conforming home loan limit to $ 625,000.

The adjustment rules dictate that compliant loan limits do not decrease. When home prices fall, loan limits remain the same as the previous year until declines in home prices have been “offset”.

Due to rising home values, compliant loan limits will be higher in all but four counties or equivalent in the United States when the new loan limits take effect on January 1, 2022.

“It’s a big bump”

These huge increases in home prices have made it more difficult for many home buyers to finance purchases. And while Freddie Mac and Fannie Mae have broadened the mortgage underwriting process for first-time homebuyers to include rent payments in the mortgage credit assessment process, there are many more home buyers who can benefit from the loan limits set. up to date, Cohn said.

“It’s a big bump,” Cohn said. “But that would make compliant loans possible for many people who had never had access to them before. Many people in New York City have never had the opportunity to enjoy the benefits of compliant loans.”

In addition to requiring a lower down payment and lower credit scores, compliant loans allow for a higher debt-to-income ratio, parents as co-signers, and other benefits.

And for the self-employed, compliant loans allow more flexibility when it comes to income requirements.

“This will be especially important next year for the many people who suffered as independent entrepreneurs during the pandemic and saw their incomes restored in 2021,” Cohn said. “If they want to buy in 2022, they can get a waiver to only provide the most recent year tax return.”

Concerns about loan limits

But not everyone is happy with the increased loan limits.

“[T]The harsh reality of a loan limit approaching $ 1 million in some areas highlights the need for Congress and the administration to assess the level of support taxpayers should provide to the mortgage market, ”said Ed DeMarco , Chairman of the Housing Policy Council, an industry group focused on housing finance.

With house prices rising faster than incomes, he said, by increasing loan limits, taxpayers will support high-income household mortgages.

The 10 most expensive postal codes in the United States have a median house price of over $ 4 million

“This encourages people to buy more expensive homes and is fueling rising house prices, exacerbating the affordability challenges we face in today’s market where supply is limited,” he said.

While the increase in loan limits occurs automatically on a formula basis, the FHFA has the discretion to implement a smaller increase or even freeze the limit, DeMarco said.

“Providing these mortgages with government-backed financing pushes up house prices and crowds out private financing,” he said.


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