Backing larger home loans now: What’s the game plan here Freddie Mac, Fannie Mae and FHA?

The Federal Housing Finance Agency during the third quarter of 2019 announced the maximum conforming loan limits for the mortgages to be acquired by Fannie Mae and Freddie Mac during this year. For the one-unit properties in 2020, the maximum conforming loan limit will be $510,400, an increase from $484,350 in 2019. This marks the fourth straight year that the FHFA has increased the conforming loan limits after not increasing them for an entire decade, between 2006 to 2016.

What is a conforming loan limit

By law, Fannie Mae and Freddie Mac are restricted from purchasing the single-family mortgages with origination balances below a specific amount. This amount is what is known as the conforming loan limit. The loans that are above this limit are known as the Jumbo Loans.

In the 70s, the national conforming loan limits for mortgages that finance single-family one-unit properties increased from $33,000 reaching $417,000 in 2006-2008, with limits 50 percent higher for four statutorily-designated high-cost areas: Alaska, Hawaii, Guam, and the U.S. Virgin Islands. Since 2008, the conforming loan limit has only been increased through various legislative acts in certain high-cost areas in the United States.

While some other legislative initiatives established temporary limits for loans originated in select time periods, a permanent formula was established under the Housing and Economic Recovery Act of 2008 (HERA). The 2020 conforming loan limit has been established under the HERA formula.

Baseline Limit Effect

Since 2016, the FHFA has increased the conforming loan limit for the first time in 10 years and since then the limit has gone up by $93,400. The Housing and Economic Recovery Act established a baseline loan limit at $417,000 and mandated that, after a period of price declines, the baseline loan limit cannot rise again until home prices return to pre-decline levels.

HERA requires that the baseline conforming loan limit be adjusted each year for Fannie Mae and Freddie Mac to reflect the changes in the average U.S. home prices. The estimates for the increases in the average U.S. home value over the last four quarters is published under FHFA’s House Price Index (HPI).

Data from FHFA show that home prices increased by 5.38 percent on average between the third quarter of 2018 and the third quarter of 2019. This means that the baseline maximum conforming loan limit in 2020 will be increased by the same percentage.

High-Cost Areas

The number of counties where the median home price far exceeds the FHA loan limit. To estimate, approximately 70 counties. These are areas where the loan limit exceeds the floor and are considered the high-cost areas.

For these areas in which 115 percent of the local median home values exceed the baseline conforming loan limit, the maximum loan limit will be higher than the baseline loan limit. HERA establishes that the maximum loan limit for the high-cost areas as a multiple of the area median home value while setting a ceiling on that limit of 150 percent of the baseline loan limit.

In 2019, the median home values increased in high-cost areas which drove the maximum loan limits in many areas. The new ceiling loan limit for one-unit properties in most high-cost areas will be $765,600-or 150 percent of $510,400.

FHA 2020 Loan Limits

The 2020 FHA loan limit for most of the country now stands at $331,760, which is an increase of nearly over 2019’s loan limit of 314,827. FHA is a requirement of the National Housing Act, as amended by the Housing and Economic Recovery Act of 2008, to set single-family forward loan limits at 115% of the median house prices. The percentage is subject to a floor and a ceiling limit. FHA calculates forward mortgage limits by Metropolitan Statistical Area and county.

For this year, the FHA minimum national loan limit, or the “floor,” of $331,760 is 65% of the Fannie, Freddie loan limit of $510,400. This floor applies to the lower-cost areas, which are the counties where 115% of the median home price is less than the floor limit.

For the high-cost areas, FHA’s 2020 loan limit is set at $765,600 which is an increase of about $40,000 from 2019’s $726,525.

FHA reports that the loan limit increased in almost all of the 3,233 counties where it backs loans, but there are a host of counties where the loan limits actually decreased.

For much more on the Fannie and Freddie Loan limits, Click Here


Works Cited


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