A Look at Conforming Loan Limits
The Federal Housing Finance Agency announced new conforming loan limits, which define the maximum loan size that Fannie Mae and Freddie Mac can acquire. The new limits for the 2023 calendar year are $726,200 for most areas, with the limit for "high cost" areas coming in at $1,089,300. While the exact dollar amount isn't something that mortgage market participants know before the release, it's becoming an annual ritual for some participants to front run the announcement, providing borrowers with an opportunity to take advantage of upcoming increases in loan limits.
Are these organizations getting inside information? Are they psychic?
No. As it turns out, anyone can play the guessing game - while some are excited for the return of 星巴克 Pumpkin Spice Lattes in the fall, I look forward to try to guess where the loan limit will come in at.
Let's look at how the limits are set and some other considerations to keep in mind.
Conforming Loan Limits - the Housing and Economic Recovery Act of 2008
The Housing and Economic Recover Act of 2008 specified a loan limit of $417,000 for mortgages secured by single-family residences, and a high cost loan limit of 150% of that amount - which would have been $625,500, but was actually increased to $729,500 for a few years during the worst of the housing downturn as a result of the Economic Stimulus Act.
Every year, these limits are recalculated as a result of the FHFA's House Price Index (HPI). In the event that the conforming loan limit should decline as a result of the calculation, those declines are stored up and applied against future increases, as was noted by the FHFA in their 2009 conforming loan limit announcement.
So the conforming loan limits are a mathematical exercise, with no discretion to be applied, right? Turns out, it's a bit more complicated than that.
A Proposal to Decrease Loan Limits
In December 2013, Acting Director Ed DeMarco asked for public input on a proposed decrease in the conforming loan limits to $400,000, except for high cost areas which would have had a limit of $600,000. The rationale for this, along with an increase to guarantee fees that was subsequently suspended by former FHFA Director Mel Watt, was to decrease the GSE footprint and allow more private capital in.
So does the FHFA have the authority to impose a lower conforming loan limit? HERA seems explicit in its calculation, but via the "Sense of Congress" expressed in Section 1124 part (c) of HERA, Fannie Mae and Freddie Mac are encouraged to utilize the full extent of the loan limit. In the Federal Register , the FHFA advances the argument that its role of conservator provides them the authority to do this.
The result? The loan limits were not decreased.
Fast forward, and we see the first HPI-driven increase for 2017. Things continue as HERA dictates.
Under former FHFA Director Mark Calabria , the FHFA did not pursue reduced loan limits. In my opinion, that should be read as former Director Calabria deciding that either the authority to reduce loan limits wasn't sufficiently clear, or that such a move could have been problematic from a housing market perspective, rather than assuming that he viewed the increased loan limits as a positive.
Optics Matter
In 2021, President Biden exercised his authority to remove Mark Calabria. Sandra Thompson was made Acting Director, before being confirmed a Director in 2022.
In between these two events came the announcement of the 2022 conforming loan limit of $647,200 with high cost areas having a loan limit of $970,800.
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That's really close to a million dollars. Eyebrows were raised.
After all, a million dollar mortgage evokes images of mansions, purchased with the benefit provided by the GSEs and backstopped by the American taxpayer...except in parts of California, where it evokes images of modest homes built in the 1950s and 1960s.
Then Acting-Director Thompson wisely read the tea leaves and put in a loan level pricing adjustment for high balance loans. Life continued, and her confirmation went smoothly after some delays wholly unrelated to her specific nomination.
And now we've crossed the million dollar mark when it comes to high balance loans.
Are eyebrows going to be raised? Certainly, although how much remains unclear.
So we can continue to expect the loan limit to increase or at least stay the same going forward?
Well, sort of.
See, there are a few things that could happen:
The first possibility is not likely to happen unless the Republicans control House, Senate, and the Presidency - and even then, they'd need to have enough libertarian or pro-Wall Street votes to pull it off. I just don't see it happening, but it's useful to at least acknowledge that it's a possibility.
The second possibility requires the GSEs to be in conservatorship. From a practical standpoint, I believe their conservatorship will end by September 7, 2028 - a date which many of you might recognize, or be able to guess the significance of.
The third possibility gets interesting, and we've already seen steps in that direction from Director Thompson before her confirmation. Can you price the GSEs out of the market, and have the private sector step in? In theory, that can happen, but private capital has to actually want to do that. While price can encourage capital to flow in a particular direction, you need to have capital waiting to be deployed that is merely waiting for the right price, or the profit potential has to be so significant that money floods in.
Of course, there is a possibility that I will call possibility 3.5 - it's basically raising prices just enough to give the appearance that the FHFA is discouraging high dollar mortgages without a material change to the market. Will such a thing happen? Perhaps - it all depends on how many eyebrows are raised by the new high balance limit and what ends up happening with the mortgage market over the coming months.
What's next?
Over the coming months, I would advise people to watch the FHFA's HPI announcements, as those quarterly numbers are what drives the conforming loan limit. In addition, with Republicans controlling the House, this means that the U.S. House Committee on Financial Services Committee could potentially make some noise with regards to the conforming loan limits as part of its oversight of the FHFA, so keep an eye on their calendar as well.
I hope you found this informative. If you have any questions, please feel free to reach out.