High home prices push Fannie Mae and Freddie Mac to back up more than $1 million in loans

Mortgage giants Fannie Mae and Freddie Mac will raise their government-backed lines of credit to a record high for 2023, with the maximum credit limit exceeding $1 million for high-cost areas, the Federal Housing Finance Agency announced on Tuesday.

According to the FHFA, although the real estate market has cooled to the face of rapidly rising mortgage rates this year, home prices are still climbing in the third quarter, with prices rising 12.21% from a year ago.

As a result, the basic compatible line of credit for 2023 will be $726,200, an increase of $79,000 from this year’s $647,200 limit. Areas with higher costs will have a new line of credit of $1,089,300, or 150% of the base line of credit. This year, the credit limit for high-cost domains is $970,800.

Mortgages above these lines of credit are considered “non-conforming” or “jumbo” mortgages and often come with higher interest rates.

Next year’s increases are not as big as those for 2022. This is largely due to the slowdown in the rise in housing prices. The 2022 increase, rising from $548,250 in 2021 to $98,950, was the largest percentage and dollar increase to date to 1980.

“The rate of U.S. home price growth has slowed significantly,” said William Doerner, supervising economist in FHFA’s research and statistics division. “This slowdown is widespread, with nearly one-third of all states and metropolitan statistical areas registering annual growth of less than 10%.”

The increase is welcome news, especially for home buyers in high-cost areas who are being pushed into more expensive jumbo mortgages for even a modest home.

“These new, much higher numbers will enable more home buyers to take advantage of Fannie Mae and Freddie Mac financing,” said Melissa Cohn, vice president of the William Raveis Mortgage area.

But not all in the housing industry agree that expanded borders are a good idea.

The Housing Policy Council, a trade association of mortgage lenders and service providers, insurers, and technology and data companies, argues that higher credit lines could worsen the affordability crisis. With home prices rising much faster than household income, taxpayers’ support for larger loans provides a subsidy that causes mortgage rates to be slightly lower, encouraging people to buy more expensive homes.

“Ultimately, this type of support fuels the rise in home prices, exacerbating the affordability challenges we face in today’s supply-constrained market,” HPC said in a statement.

Fannie Mae and Freddie Mac buy back about half of all mortgages in the US, but they are not lenders. Instead, Freddie and Fannie buy loans from lenders and sell them to investors. This makes these loans cheaper for lenders and keeps the loan accessible and relatively affordable for consumers, among other benefits.

The base line of credit is the maximum credit amount for a unit purchase, not the purchase price.

By classifying loans with higher balances as eligible loans, more home buyers can qualify for loans that are typically cheaper, require less down payment, and allow for lower credit scores. Jumbo loans are more expensive and more difficult to qualify for due to the higher risk they carry.

The FHFA’s formula for increasing limits each year looks at how much home prices have risen during the year. The law sets the maximum credit limit in high-cost areas as a multiple of the region’s median home value, up to a maximum of 150% of the base line of credit.

High-cost cities include areas such as San Francisco and Silicon Valley, as well as New York City and Washington, DC and suburbs around cities.

It is FHFA’s practice not to allow credit limits to be lowered. When home prices fall, lines of credit remain the same as in the previous year until home price reductions are “applied”. For example, the basic credit limit value did not change in 2007 after the housing collapse and remained at the same level until 2017, when it rose again.

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