iStock illustration
As the pandemic and low interest rates continue to fuel a surge in homebuying, the short supply of suitable houses is driving up home prices and, in turn, the need for larger mortgages.
“The home, in my mind, has gotten much more important than it was in the past – even in just the last seven or eight months,” said Shant Banosian, a senior vice president at Guaranteed Rate. “People are definitely buying bigger homes and reevaluating what they want in their homes, and that, generally, is more expensive.”
The need for larger mortgages often puts homebuyers above the conventional threshold and into a jumbo mortgage, a more expensive option that was also a less attractive alternative for lenders before the pandemic and even more so now, loan originators say.
The U.S. government may have just given the mortgage industry a reprieve. The Federal Housing Finance Agency announced in November that conforming loan limits will increase by almost 7.5 percent in 2021. The new limits could keep homebuyers from having to seek jumbo loans while lenders will benefit from being able to sell more loans to Fannie Mae and Freddie Mac.
By selling more loans to Fannie Mae and Freddie Mac, lenders typically get a better rate than they would by keeping the loan on their own balance sheets in the current environment of low interest rates, said Jay Tuli, president of Arlington-based Leader Bank.
For lenders to sell mortgages to Fannie Mae and Freddie Mac, the loan amount cannot exceed the FHFA’s conforming limit, which for owner-occupied single-family and condominium properties will increase from $510,400 in 2020 to $548,250 in 2021, a 7.42 percent increase.
After remaining stagnant for a decade, conforming limits began increasing with loans originated in 2017 and have continued to go up each year since.
The FHFA adjusts the conforming loan limit to reflect the change in the average U.S. home price, as required by the Housing and Economic Recovery Act (HERA). The conforming limit is determined by the FHFA’s estimated housing price increase. According to FHFA’s seasonally adjusted data, America’s house prices increased 7.42 percent between the third quarters of 2019 and 2020.
In some counties, more expensive homes mean the conforming limit is higher as well. Both Dukes and Nantucket counties will qualify for the maximum limit of $822,375, up from $765,600 in 2020.
Essex, Middlesex, Norfolk, Plymouth and Suffolk counties will have a conforming loan limit in 2021 of $724,500. The 2020 limit in these counties is $690,000. The other seven counties in Massachusetts will be subject in 2021 to the $548,250 limit.
Rising even higher than the conforming loan limit increase are median home prices in the state. Massachusetts through the first 10 months of 2020 has seen the year-to-date median single-family sale price increase 10.6 percent year-over-year, according to The Warren Group, publisher of Banker & Tradesman. Essex County has seen a 12.3 percent increase to $515,000; Plymouth County has gone up 11 percent to $433,000; and Middlesex County is up 9.8 percent to $615,000.
A higher FHFA conforming loan limit will increase the number of homeowners eligible to refinance their mortgage.
Jumbo Loans Jump
The number of jumbo loans issued in several counties has jumped as the region’s home prices have climbed higher.
Essex County had 1,190 jumbo loans used to purchase single-family homes during the first three quarter of 2020, four times as many compared to the same time period in 2019. About 28 percent of Essex County’s purchase loans during the first three quarters of 2020 were jumbo loans, compared to about 6 percent in the same time period last year.
Middlesex, Norfolk, Suffolk and Plymouth counties have also seen more jumbo loans in 2020.
Some borrowers in 2021 will instead be eligible for conventional loans, which come with lower rates, less expensive private mortgage insurance and lower down payment requirements. And the higher limits might also open the market up to more borrowers.
“Being able to borrow on a conventional loan up to $724,500 is very impactful because conventional loans allow for lower down payments,” Banosian said. “You can buy with as little as 5 percent down on a single family or a condo [as a first-time buyer], and a lot of times in an expensive market that’s the biggest barrier to entry – the down payment.”
The availability of more financing could keep driving home prices higher, Tuli said, but the increase was needed because the conforming loan limits had not kept up with housing prices in the Greater Boston area.
The increased conforming loan limits could also trigger more refinances, Tuli added, including for borrowers who took out a loan within the last couple of years for an amount that is now within the conforming limit. Some borrowers have also combined conventional loans with home equity lines of credit to avoid a jumbo loan. These borrowers could now be in a position to refinance into a conventional loan.
Limit Not Enough for All
Even outside of the Greater Boston area, the lower conforming limits could help borrowers. Denise Peach, a senior vice president of mortgage banking at Total Mortgage Services, said she contacted several of her clients looking for homes in higher price ranges to let them know about the increase.
But not all borrowers will benefit. Peach works primarily in the northern Worcester County area, which has the lowest conforming loan limit of $548,250. Even with Worcester County’s median single-family sale price of $322,500, buyers looking to make purchases on the higher end still won’t qualify for a conventional loan.
“I was hoping this year that [the FHFA] actually would have made a bigger increase than they did,” Peach said. “I was actually surprised.”
Selling jumbo loans on the secondary market has been difficult during the COVID-19 pandemic, Peach said, with investors setting higher standards for credit scores, down payments, debt-to-income ratios and cash reserves.
Diane McLauglin
Banks that keep loans in their own portfolios rather than selling them to Fannie and Freddie will have difficulty competing with lenders that can offer better rates because they sell the loans, Tuli said. Working in the jumbo market could be an option for banks keeping loans on their balance sheets, Tuli said.
With interest rates forecast to remain low and buyers motivated to find new homes during the pandemic, Banosian said, the higher conforming loan limit could help make home ownership more attainable.
“It’s kind of like the perfect storm of things that’s creating a lot of demand, and we’re very fortunate the U.S. market seems to be very strong right now leading the way,” Banosian said
