Demystifying Annual Loan-Limit Increases

Pulling back the curtain on the ins and outs of annual increases

Insider

Chief Operations Officer, Atlantic Bay Mortgage

The mortgage industry is vast, complex, and ever-changing. The best leaders strive to constantly learn all aspects of lending and how it affects our clients. I have been in the mortgage industry for 25 years and worked in many facets of the origination side, everything from originating to post-close to underwriting. I really settled into underwriting before moving into leadership.

About five years ago, as I embarked on my leadership journey, I also began to invest heavily in my understanding of the industry in whole, from loan administration to current regulatory topics. There have been many realizations along this recent journey that have blown my mind. There have been many moments of “holy cow, that is how it works!” and “how did anyone not know this?” I would like to share some of these discoveries here.

Given this is January, and we are all originating under the new 2022 loan limits, I thought it would be an opportune time to talk about how loan limits are decided, and what the heck happened in September with the “early release of $625,000.”

As many of you know, the FHFA releases their annual loan limit increases usually at the end of every November. In September 2021, many companies were advertising early release of 2022 loan limits at $625,000. Most executives sat around and scratched our heads at how they were doing this. Did they have excess room on their balance sheets that they needed to fill up before the end of the year? Was there an insider that leaked some information?

As we searched for answers, I stumbled upon something that shocked me because, how did I not know this? Many of us assumed that every November a bunch of executives from the FHFA sat around a table and discussed what the loan limits should be for the next year. That is not at all what happens! In fact, it is a mere calculation.

The 2008 Housing and Economic Recovery Act amended the laws surrounding the calculation and implementation of Conforming Loan Limits (in Section 1124). Fun fact: this is when we stopped seeing the $417,000 loan limit that we all knew oh so well prior to this date.

On Sept. 28^th, the FHFA announced the Housing Price Index for July over July (remember it has to be Q3 over Q3) of 19.2%.

I’ll save you the legalese and just recap what it says. By law, the FHFA is to compare the housing index increase or decrease Q3 over Q3. That index is applied to the current loan limits to create the next year’s limits. For instance, in 2020, the FHFA announced 2021’s loan limits. They increased from $510,400 to $548,250. As noted in the FHFA announcement, the 2020 House Price Index report indicated the increase in index was 7.415% (they rounded in their announcement to 7.42% for simplicity’s sake).

So, what happened in September 2021? On Sept. 28, the FHFA announced the Housing Price Index for July over July (remember it has to be Q3 over Q3) of 19.2%. That is insanity, however. It has been a crazy year in real estate home prices, as we all know. If you look at the current loan limit in comparison to the $625,000, that index is 14%. It’s safe to say, $625,000 was a reasonable amount given we only had to account for two more months.

Some of the industry waited on pins and needles for Nov. 30to come and the new limits to be announced to see if they were safe in the risk they took. Luckily, we can all sigh a huge breath of relief as we all know the new loan limits are $647,200 for one-unit properties. However, now we know how it works and what to expect.