Lew Sichelman
The mortgage market is in for another big shift in a few months. That’s when a sizable increase – roughly 12 percent or 13 percent – in the conforming loan limit appears likely to be announced. If so, it will bring the ceiling to well over $1 million in places where houses are super expensive.
The loan limit is a key benchmark for both borrowers and lenders. It is the maximum dollar amount on mortgages that can be acquired by government-sponsored enterprises Fannie Mae and Freddie Mac. Anything under the limit that is sold by primary lenders to the GSEs must comply to their rules (thus the term “conforming”), while anything above the ceiling is considered a jumbo loan.
It’s important for borrowers to understand that distinction because loans touched by Fannie and Freddie are usually priced cheaper than other loans. That’s because the investors who buy loans through the GSEs believe, rightly or wrongly, that Fannie and Freddie will make good on them should they go into default.
The conforming loan limit is adjusted annually by the government, formerly by the Department of Housing and Urban Development, but now by the Federal Housing Finance Agency. The limit for this year is $647,200 in most places – a whopping 18.5 percent higher than the 2021 limit of $548,250 – and it’s $970,000 in a handful of high-cost markets.
Any changes will be announced on Nov. 29, when third quarter prices are revealed, and will go into effect at the beginning of the new year.
Home Price Growth Slows
House price increases have slowed lately because of higher mortgage rates and inflation fears, which have combined to send many wannabe buyers and sellers to the sidelines. But at least until the middle of the year, houses were still selling fast and furious and for top dollar.
The Case-Shiller Home Price Indices for June was up less than 1 percent from May. But year-over-year, it was up 18 percent. And the FHFA’s quarterly index was up 17.7 percent for the same period. Consequently, it’s highly probable that the loan limit will rise higher still.
If we use the latest figures from the FHFA, another double-digit jump in the loan limit appears to be in the offing. Based on second-quarter numbers, the ceiling would rise 12 percent, to nearly $725,000. In high-cost markets, it would fly past the million-dollar benchmark to roughly $1,087,500. If there was just a 3 percent year-over-year increase in the index in the third quarter, the baseline limit would still increase by 15 percent, to $745,000. If the bump in the index was 6 percent, the ceiling would rise by 18 percent, to $764,000.
All this is pure speculation, of course. There’s still a long way to go until the third-quarter figures on which the limit is based are announced. But whatever the outcome, higher-end borrowers will be the beneficiaries, not the low- and moderate-income families Fannie Mae and Freddie Mac were created to serve.
So, expect to hear from lots of affordable housing advocates about how the secondary market, where the GSEs operate, is now totally out of whack.
FHFA Signals Intent
In that regard, FHFA Director Sandra Thompson indicated a willingness to consider changes in the loan limit formula during a recent congressional hearing. In response to a question from Rep. Andy Barr of Kentucky, Thompson said, “We’re happy to work with you all if you’d like to change it or tweak it.”
At the same time, Thompson testified that her office is merely following a calculation that is a “statutory” requirement. But Paul Manchester, a former principal economist at the FHFA, told me that’s not necessarily the case.
Manchester, who also spent 17 years at HUD, believes the director has the discretion to set limits lower, though he concedes that has never happened. He points out that any declines should be factored into the equation before any increases are made.
On the flip side, you won’t hear any griping from struggling Main Street lenders who are trying to stay afloat as the mortgage sector has weakened. They would be eager to take another bite out of the jumbo loan market, where lenders who serve well-heeled borrowers are “making a ton of money,” said Paul Muolo, executive editor of trade publication Inside Mortgage Finance.
For what it’s worth, there’s about a 30-day window between the new limits being announced and going into effect. During that time, many lenders jump the gun by raising their ceilings, but they hold on to their loans until they can sell them to the GSEs early next year. Some will even offer conforming loans at the higher ceiling prior to the November announcement based on their own assessments about how high the limit might rise.
Consequently, savvy buyers and refinancers who move quickly prior to Dec. 31 will be able to take advantage of a small, but still significant, price break before the increase actually takes effect.
Lew Sichelman has been covering real estate for more than 50 years. He is a regular contributor to numerous shelter magazines and housing and housing-finance industry publications. Readers can contact him at lsichelman@aol.com.
