FHFA Raises Maximum Loan Guarantee Limits

The Federal Housing Finance Agency on Wednesday announced that it will raise the amount Fannie Mae and Freddie Mac can guarantee on mortgage loans next year.

The new maximum conforming loan limits for mortgages acquired by Fannie Mae and Freddie Mac in 2017 will increase from $417,000 to $424,100 in most parts of the country. It will be the first time the baseline loan limit has increased since 2006.

The baseline of $417,000 had been set by the Housing and Economic Recovery Act of 2008, with the requirement that the limit be adjusted annually in order to reflect the changes in the national median home price.  The recession, however, got in the way. A long period of declining home prices nationally stifled the growth of the baseline, and HERA stated that the loan limit could not rise again until the average U.S. home price returned to pre-decline levels.

“The 2017 conforming loan-limit increase announced today was prompted by the fact that house prices have surpassed the pre-decline level established in the third quarter of 2007, according to the FHFA index. Nominally, the price recovery is officially complete, but in real purchasing-power adjusted terms, houses prices are still far below the pre-decline peak. The underlying story is consumer house-buying power is better than it has been in a generation,” said Mark Fleming, chief economist at First American.

Along with the news of the baseline increase, FHFA published its third quarter 2016 House Price Index, showing that for the first time since Q3 of 2007, U.S. average home values are finally in a place where the baseline limit can increase. According to the FHFA, that average for Q3 of this year was roughly 1.7 percent above the value for the third quarter of 2007. this allows the baseline loan limit will increase by that percentage.

According to FHFA, the prerequisite for increasing the maximum limit occurred in all but 87 U.S. counties in Q3.

The new limit of $424,100 is the limit for most of the country, but some high-cost areas will see an accordingly higher ceiling. Areas were local median values are between 115 and 150 percent higher than the national median, the limit will rise to meet the higher price point. FHFA capped the baseline at $635,100 for properties in Alaska, Hawaii, Guam, and the U.S. Virgin Islands.

In its September 2016 Mortgage Monitor released in early November, Black Knight Financial Services discussed the possible effects of the FHFA raising the conforming loan limit for GSEs.

“Our analysis shows that there are approximately 17 times as many originations—roughly 100,000 in total over the past 12 months—right at the conforming limit compared to preceding dollar amount buckets, and that originations drop off by about 70 percent immediately above the limit,” Black Knight Data & Analytics EVP Ben Graboske said. “In addition, the data shows that a GSE loan originated right at the conforming limit is nine times more likely to carry a second lien than one that is not. One example scenario shows that, with all else being equal, raising the conforming loan limit by $10,000 could result in a one percent increase in originations—approximately 40,000 new loans and $20 billion in new loan balances.”