By Anna Bahney | CNN
Home prices across the country have seen stratospheric increases over the past year as demand for homes has risen and inventories have fallen.
But higher prices are expected to push loan limits in line with what experts predict will be record increases in 2022, with the maximum loan limit nearing $ 1 million for high-cost areas. The expected increases were reported by The Wall Street Journal on Tuesday, and industry publications also predicted the changes.
Mortgages in excess of “compliant” loan limits imposed by federal mortgage giants Fannie Mae and Freddie Mac are considered “non-compliant” or “jumbo” mortgages and typically carry higher interest rates.
The increase is great news for homebuyers, especially those in high-cost areas who were 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 worry 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 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 Federal Housing Finance Agency, which oversees the two mortgage giants, is expected to announce the new compliant loan limits at the end of November. But the formula for increasing the limits each year takes into account the increase in house prices over the course of the year – and in 2021, that has been a lot.
The maximum basic conforming loan amount is currently $ 548,250. This goes up to a maximum amount for conforming loans of $ 822,375 in high cost areas like San Francisco and Silicon Valley, New York and most of the suburban counties that surround it, and Washington, DC and its surrounding areas. surrounding suburbs. 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.
Compliant loan limits are adjusted each year to reflect the change in the average US home price. 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.
Last year, home prices rose 7.42% on average between the third quarters of 2019 and 2020, according to the FHFA home price index. As a result, the maximum compliant benchmark loan limit in 2021 has increased by the same amount. But this year, home prices are expected to have risen a lot more.
The most recent figures from the FHFA’s home price index for August show prices are up 18.5% from a year ago. Based on this metric, the baseline compliant loan limit would be around $ 650,000 and the loan limit in some high cost areas, at 150% of baseline, would be around $ 975,000. But details have yet to be announced.
Some lenders are anticipating the announcement and are already adjusting their offer, including United Wholesale Mortgage and Homebridge Wholesale, which are raising the maximum compliant home loan limit to $ 625,000.
“It’s 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 almost all – 99% – of the 183 markets tracked by NAR in the third quarter, with double-digit price increases seen in 78% of markets.
These price increases 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 have never had the opportunity to enjoy the benefits of conforming 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 in 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 increasing limits expected for compliant loans.
“Approaching $ 1 Million Loan Limit Highlights the Need for Congress and the Administration to Give Serious Consideration to the Support Taxpayers Should Provide to the Mortgage Market,” said Ed DeMarco, President of Housing Policy Council, an industry group focused on housing finance.
He said that as house prices rise faster than incomes, increasing loan limits allows taxpayers to support mortgage lending for high-income households.
“Taxpayer support for mortgage-backed securities translates into slightly lower mortgage rates,” he said. “It 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. “
While the increase in loan limits occurs automatically on the basis of a formula, the FHFA has the discretion to implement a smaller increase or even freeze or reduce the limit, DeMarco said.
“Providing these mortgages with government-backed financing pushes up house prices and crowds out private financing,” he said.