Home prices across the US have seen stratospheric increases within the past year as demand for homes spiked and inventory tanked.
But higher prices are expected to push the limits of conforming loans to what experts anticipate may be record increases in 2022, with the maximum loan limit at nearly $1 million for high-cost areas. The expected increases were reported by the Wall Street Journal Tuesday, and industry publications have been forecasting the changes, too.
Mortgages above these loan limits are considered “non-conforming” or “jumbo” mortgages, and typically come with higher interest rates.
The increase is great news for homebuyers, especially those in high-cost areas who were being pushed into a jumbo mortgage even for a modest home, said Melissa Cohn, regional vice president at William Raveis Mortgage. “There are so many benefits to having a conforming loan, increasing the loan limits will be huge.”
But some analysts are concerned that increasing the limits to nearly $1 million may mean the government is playing too big a role in supporting high housing prices.
What are conforming loan limits?
Freddie Mac and Fannie Mae, which back about half of all US mortgages, are not lenders, but they buy loans from lenders and sell them to investors. That makes those loans cheaper for lenders, which in turn usually leads them to offer consumers lower interest rates, among other benefits.
By categorizing higher-balance loans as conforming, more homebuyers can qualify for loans that are typically less expensive, require smaller down payments and allow for lower credit scores. Jumbo loans are more expensive and harder to qualify for because of the higher risk they carry.
The FHFA’s formula for boosting the limits each year looks at how much home prices have grown during the year. The law establishes the maximum loan limit in high-cost areas as a multiple of the area’s median home value, up to a maximum of 150% of the baseline loan limit.
For 2021, the baseline conforming loan maximum is $548,250. That ranges up to a top amount of $822,375 in high-cost areas like San Francisco and Silicon Valley, as well as New York City and Washington, DC, and the cities’ surrounding suburbs. Of the 3,000 counties in the US, there are roughly 100 that meet the highest cost threshold, in which 115% of the local median home value exceeds the baseline conforming loan limit.
Conforming loan limits are adjusted each year to reflect the change in the average US home price. The law establishes the maximum loan limit in high-cost areas as a multiple of the area’s median home value, up to a maximum of 150% of the baseline loan limit.
The annual adjustment is based on an expanded data FHFA House Price Index, a version of the index that includes a broader data set. Last year, home prices increased 7.42%, on average, between the third quarters of 2019 and the third quarter of 2020, according to the index. As a result, the baseline maximum conforming loan limit in 2021 increased by the same amount. But this year, home prices have grown a lot more.
The nominal, seasonally adjusted, expanded-data FHFA House Price Index saw home prices increase 18.05% on average, (a slightly lower number than the flagship “purchase only” index which was 18.5%) between the third quarters of 2020 and 2021, so the baseline conforming loan limit increased by the same amount.
Some lenders anticipated the announcement and have already adjusted what they are offering, including United Wholesale Mortgage and Homebridge Wholesale, which increased their maximum conforming home loan limit to $625,000.
‘It is a big bump’
The median price of a home was $363,700 nationally in the third quarter, up 16% from a year ago, according to the National Association of Realtors. Home prices rose in nearly all – 99% – of the 183 markets tracked by NAR in the third quarter, with double-digit price increases seen in 78% of the markets.
These huge jumps in home prices have made it harder to finance purchases for many homebuyers. And while Freddie Mac and Fannie Mae have expanded the mortgage underwriting process for first-time homebuyers by including rental payments in the mortgage credit evaluation process, many other homebuyers can benefit from the updated loan limits, said Cohn.
“It is a big bump,” Cohn said. “But it would make conforming loans possible for a lot of people who never had access before. Many people in New York City never had the opportunity to take advantage of the benefits of conforming loans.”
In addition to requiring a lower down payment and lower credit scores, conforming loans allow for a higher debt-to-income ratio, parents as cosigners and other benefits.
And for the self-employed, conforming loans allow for more flexibility when it comes to income requirements.
“That will be especially important next year for the many people who suffered as self-employed business people during the pandemic and saw their income restored in 2021,” said Cohn. “If they want to buy in 2022, they can get a waiver to only provide the most recent year’s tax return.”
Concerns about the loan limits
But not everyone is happy about the increasing loan limits.
“Approaching a $1 million loan limit highlights the need for Congress and the administration to think hard about how much support taxpayers should provide the mortgage market,” said Ed DeMarco, president of the Housing Policy Council, an industry group focused on housing finance.
With home prices rising faster than incomes, he said raising loan limits means taxpayers will be backing mortgages for higher-income households.
“Taxpayer backing of mortgage securities results in slightly lower mortgage rates,” he said. “This encourages people to buy more expensive homes and it feeds the runup in house prices, exacerbating the affordability challenges we face in today’s supply-constrained marketplace.”
While the increase in the loan limits happens automatically based on a formula, the FHFA has the discretion to put in place a smaller increase or even to freeze the limit, DeMarco said.
“Providing such mortgages with government-backed financing drives up house prices and crowds out private financing,” he said.