US government to support mortgages over $1 million in high-cost areas

By | November 29, 2022

WASHINGTON — The federal government is about to guarantee mortgages of more than $1 million for the first time in high-cost markets such as parts of California and New York.

The increase reflects the rapid appreciation in home prices in recent years, even as the mortgage market has cooled recently.

The maximum size of mortgage loans eligible for Fannie Mae and Freddie Mac financing will increase to $1,089,300 next year in some expensive markets such as San Francisco and Washington, DC, from $970,800 this year, the Federal Housing Agency said. Housing Financing on Tuesday. 🇧🇷

For most of the country, borrowing limits will rise to $726,200 from a high of $647,200 in 2022, said the FHFA, which oversees mortgage finance giants. By law, loan limits are calculated annually using a formula that takes average house prices into account.

In all, about 100 counties and equivalents, out of more than 3,000 in the US, are designated high-cost markets, also including some in New Jersey, Virginia and Utah, according to the FHFA.

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The increase could make it easier and cheaper for borrowers to buy single-unit homes, especially those close to the boundaries. The higher limits are also expected to renew a debate about how big a mortgage is too big to be supported by the government.

Mortgages within limits are called conforming loans and often come with lower closing costs and may require a lower payment than mortgages that exceed the limit, known as jumbo mortgages.

Any relief that higher loan limits might offer homebuyers will likely be more than offset by higher interest rates and home prices, which have cooled the housing market. Existing home sales were down for nine straight months through October, according to the National Association of Realtors.

Mortgage interest rates have skyrocketed this year, reaching 7% for the first time in two decades. Many potential homebuyers failed to qualify for loans or had to cut their buying budgets after higher rates raised their expected monthly costs by hundreds of dollars.

The average selling price of an existing single-family home rose 8.6% in the third quarter from a year earlier, the association of realtors said. Prices have risen at an even faster pace in recent years as demand for homes has surged during the pandemic.

Fannie and Freddie don’t take out loans. The companies, which have been under government control since 2008, instead buy mortgages from lenders and package them into bonds that are sold to investors. The companies’ policy changes are important because their role in supporting about half of the $13 trillion mortgage market helps determine who has access to mortgage credit and on what terms.

When the loans qualify to be purchased by Fannie and Freddie, this allows them to be securitized in a market that attracts a global pool of investors, allowing the loans to carry lower interest rates than they otherwise would. However, for much of the post-crisis period, jumbo loans were better priced than conforming loans, in part because banks found them valuable in attracting wealthy clients with whom they could do other business, industry officials say.

Mortgage bankers and real estate agents say the new limits are needed to reflect higher home prices. Fannie and Freddie’s loan limits “need to keep up with house prices to deal with affordability,” said Anthony Lamacchia, a broker and owner of a real estate company near Boston.

Home to Fannie Mae, which supports, along with Freddie Mac, about half of the US mortgage market.


Photograph:

KEVIN LAMARQUE/REUTERS

In expensive markets, even entry-level homes can fetch seven-figure prices. In a 2022 housing survey, the California Association of Realtors found that nearly a quarter of homes sold between $1.25 million and $2 million were purchased by first-time buyers. Numbers were slightly higher in the San Francisco area and Southern California, the group said.

Some housing policy experts say the jump in lending limits raises questions about whether taxpayers should effectively support high home prices. Fannie and Freddie’s market share increased significantly during the pandemic to more than 60% of new loans, according to the Urban Institute, a Washington think tank that conducts research on economic and social policy.

“Perhaps the loan limit actually higher than $1 million will get someone’s attention and at least spark some much-needed political discussion about the government’s presence in the mortgage market,” said Ed DeMarco, a former senior FHFA official who is now chairman of the Housing Policy Council. , a real estate trade group that generally favors an increased role for private equity in the mortgage market.

Housing affordability will not really be addressed until a long-term supply shortage of new homes is resolved, he added.

Critics of Fannie and Freddie’s big role say borrowers who can afford million-dollar mortgages should be able to finance a home without government funding.

Write to Andrew Ackerman at [email protected]

Housing is one of the most heavily weighted categories in tracking inflation, but it is also one of the most complicated to measure. The WSJ’s David Harrison explains how the shelter ratio is calculated and why it can confound the inflation outlook for the Fed. Illustration: Laura Kammermann

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