WASHINGTON—The federal government is about to back mortgages of nearly $1 million for the first time.
The maximum size of home-mortgage loans eligible for backing by Fannie Mae and Freddie Mac are expected to jump sharply in 2022, a reflection of the rapid appreciation in home prices nationally over the past year.
The increase may make it easier and cheaper for some borrowers to buy a home, particularly in more expensive areas of the country, but the higher limits are also likely to elevate debate about how big of a mortgage is too big to be backed by the government.
“Housing prices are expensive,” said Steve Walsh, president of Scout Mortgage in Scottsdale, Ariz., adding that some of his clients are unable to qualify for loans for modest-sized homes under the current limits. “I don’t believe these people are looking for a castle, just a three-bedroom house with a backyard,” Mr. Walsh said. By law, the loan limits are updated annually using a formula that factors in average housing-price increases nationwide.
Currently, the government-controlled mortgage companies can back single-family mortgages that have balances as high as $548,250 in most parts of the country and up to $822,375 in expensive housing markets, including parts of California and New York.
Those limits are expected to jump to a baseline level of about $650,000 in most jurisdictions and to just under $1 million in high-cost markets.
In all, about 100 counties out of more than 3,000 counties across the U.S. are designated as high-cost markets, according to the Federal Housing Finance Agency.
The precise loan limits are set to be announced Nov. 30 by the agency, which oversees the two mortgage giants, and the new limits will go into effect in January. Mortgages within the limits are called conforming loans; mortgages that exceed them are called jumbo mortgages, which tend to be more expensive for borrowers to obtain and generally have larger down payments for comparable borrowers.
Mortgage bankers and real-estate agents say the new limits should keep pace with the double-digit rise in home prices. Low mortgage-interest rates and buyers looking for more space during the pandemic has helped fuel the housing price surge in recent months, along with a significant shortage of new homes.
Nationwide, the median single-family, existing-home sales price rose 16% in the third quarter to $363,700 from a year before, a record in data going back to 1968, the National Association of Realtors said Nov. 10.
But some housing experts say the expected jump in loan limits raises questions about the appropriate role of the government in housing and whether taxpayers should effectively backstop sky-high housing prices, when Fannie and Freddie’s market share is already rising.
Fannie and Freddie, which guarantee about half of the $11 trillion mortgage market, don’t make loans. They instead buy them from lenders and package them into securities that are sold to investors. The companies’ market share during the pandemic jumped to nearly 60% of all new mortgages, up from about 42% in 2019, according to the Urban Institute, a Washington think tank that conducts research on economic and social policy.
“For some policy makers, the one-million-dollar threshold will catalyze concern and conversation,” said Isaac Boltansky, a policy analyst at brokerage firm BTIG. “The annual loan limit formula is an elegant means of adjusting policy without disrupting markets, but it skirts the bigger and more consequential debates over the optimal and appropriate role of the government in the housing market.” The government assumed control of the firms in 2008 during the height of the financial crisis to prevent their failure. Under the terms of their 2008 conservatorships, they currently have access to more than $250 billion in support from the Treasury Department.
Some housing-policy experts who are wary of Fannie and Freddie’s outsize role say the sharp expected rise in loan limits should prompt policy makers to debate the level of government support that is necessary for a mortgage. Borrowers who can afford million-dollar mortgages should be able to finance a home without government-backed financing, they say.
They favor policies that would eventually wean the mortgage market off government support and allow the market for nongovernment-guaranteed mortgages to take a bigger role, particularly for high-dollar loans.
“We’re continuing to go down a trail in which we see the Treasury, through the backstop of Fannie and Freddie in conservatorship, backing larger and larger loans, taking up more and more of the market,” said Ed DeMarco, a former top FHFA official who is now president of the Housing Policy Council, a housing-industry trade group. “At some point, you would expect Treasury and the Congress would want to ask, is this really where we want to be going?” Mr. DeMarco’s group favors the FHFA using its powers as conservator of Fannie and Freddie to either freeze or drop the loan limits, essentially overruling the annual formula that calls for a rise in loan limits.
Real-estate agents say constricting the loan limits would punish borrowers in pricey markets where modest starter homes can fetch seven-figure prices.
In a 2021 housing survey, the California Association of Realtors found that about one-quarter of the homes sold between $1.25 million and $2 million were purchased by first-time home buyers. That figure was about 40% in the San Francisco area, the group said.
“Shrinking the government’s role in the mortgage market will only hurt first-time and low- and moderate-income home buyers,” said Dave Walsh, president of the California Association of Realtors.
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