The Loan Limits Changed: So What?

Stability gets added to the housing market

Insider

Contributing Writer

Throughout 2023, and for many years in the past, the bulk of residential loan production has been “Agency.” Call them Freddie Mac and Fannie Mae, also known as the Government Sponsored Enterprises, the GSEs, or the Agencies, both are overseen by the Federal Housing Finance Agency and their policies and procedures ripple through the industry. This includes loan limits.

Recall that “Conventional Loans” are defined as any mortgage that isn’t insured by a government agency. “Conforming Loans” are simply a conventional loan program that conforms to criteria set forth by Fannie Mae, Freddie Mac, and the FHFA, which is their regulator. Traditionally, conventional conforming loan limits are announced right around Thanksgiving, and they recently came out. But a month earlier, in October, several lenders, investors, and private mortgage insurance companies “jumped the gun” on the official news and, calculating the change in home prices that the Agencies monitor, established their own limits.

Every year the loan limits are reviewed and adjusted according to the home values across the country. The FHFA adjusts the conforming loan limits to reflect changes in the housing market. This helps ensure the average homebuyer can still get a conventional mortgage, even as housing costs rise.

The FHFA, which oversees Freddie & Fannie, determines the loan limits with its House Price Index report which tracks the average increase in home values over the year and then adjusts the loan limit accordingly. A permanent formula was established under the Housing and Economic Recovery Act of 2008 (HERA). If you’re interested, look for Section 1124, pages 39-40.

Who’s To Care?

Since the creation of the conforming mortgage products in 1980 (with an original limit of $93,750) until 2006 there had never been a year without an increase in the loan limit (save for a $150 decline in 1990). From 2006 to 2016, the limit remained at $417,000. In 2008, as a reaction to the severe decline in real estate sales and values, FHFA created the “high balance” or “conforming jumbo” products for the GSEs, which have slightly stricter underwriting guidelines, higher loan limits, and higher costs/rates.

The official procedure didn’t stop some groups from pre-empting the FHFA’s calendar and calculations & announcement by coming out with their own 2024 loan limits. Lenders and investors like Guild, Pennymac, CMG, Supreme, SWBC, United Wholesale (UWM), and Rocket rolled out single-family limits of $750,000. Private mortgage insurance companies like Arch, Enact, Essent, and National MI followed. Given the appreciation that we’ve seen in single family homes during the pandemic, limits have really shot up: in 2020 it was $548,250, went $625,000 for 2022, and 2024 has followed. (Be careful of apparent misleading headlines claiming falling real estate values.)

Why should the average lender care? As noted above, the lion’s share of residential loan fundings are priced, underwritten, and processed to Agency guidelines. The amount of business done through other channels, such as jumbo, FHA or VA, is directly influenced by Freddie Mac and Fannie Mae’s pricing and underwriting guidelines.

The family needing a mortgage can benefit from easier underwriting standards and possibly a lower rate from a high-balance conforming mortgage instead of a “jumbo” mortgage.

Loan limits determine the approval guidelines for mortgages within the loan limit range. “Conforming,” or “conventional,” mortgages are funded by lenders and sold to either Fannie Mae or Freddie Mac (the GSEs), which then pool mortgages and create MBS and sell them to investors. Lenders approve and fund conforming loans using guidelines established by either Fannie or Freddie (there are some slight variances). If a mortgage fits the guidelines and is done in a compliant manner, it can be purchased by the GSE or by an aggregator who will in turn sell it to F&F. Investors who purchase MBS from either Fannie or Freddie know that their investment meets the criteria required by the issuing GSE. Loan limits are set to ensure the GSEs are facilitating financing for families that can benefit the most from lower down payment lower interest rate mortgages.

Limits are important because a family needing a mortgage for $750,000 can obtain a conforming mortgage at, say, 7.5% instead of a high-balance (jumbo) mortgage for 8 or above. The family needing a mortgage can benefit from easier underwriting standards and possibly a lower rate from a high-balance conforming mortgage instead of a “jumbo” mortgage.

Higher loan limits enable families to afford a higher priced home, or the same-priced home with a smaller down payment. This also has the effect of putting upward pressure on home prices or at least dampening any slowdown in prices. And all of this helps lend stability to the housing market.