Is it time to cap the conforming loan limit?
Last November, the Federal Housing Finance Agency (FHFA) announced the annual compliance limit change, which limits the price at which Fannie Mae and Freddie Mac are allowed to purchase single-family home loans.
Until 2008, this was a single, fixed amount, but legislation passed that year created exceptions for high-cost areas that allowed GSEs to purchase home loans for 150% of the amount basic.
For 2022, the FHFA has set the compliance limit at $647,200, an 18% increase from 2021, intended to largely reflect real estate price increases seen across the country. This means that the upper limit for high cost areas is now $970,800.
Although this increase occurs every year, it has caught the attention of many industry players due to the strong year-over-year increase and the fact that the upper limit eclipses the million dollar mark. .
One of these people was Don Layton the Senior Industry Fellow for the Harvard University Joint Center for Housing Studiesalso former CEO of Freddie Mac, who suggested that now is the time to reassess, and perhaps change, the GSE loan limit system, along with the other government mortgage agencies, the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VIRGINIA).
To help inform the debate, Layton posed and answered five questions:
While $1 million is a catchy number, the benchmark cap and high-cost zone calculations simply reflect the extremely high growth in real estate prices in recent years, which seems to be exactly how the system loan limit should work. Wouldn’t any reduction in the limits therefore be a lesson for the American owner?
According to Layton, this is a valid point of view when considering only compliant loan limits. But loan limits don’t exist in isolation, and there have been a number of factors that have driven compliant loan limits to hit the $1 million mark. A specific number is the market share of these loans. Between 2001 and 2003, the market share between the four agencies was 55%, more recently this number has increased to 70%. This increase is attributed to the market loss of private label loans after the housing crisis and now represents a “new normal” in the market.
“That 70% range is an extraordinarily high level and I don’t think it was ever contemplated when the 2008 legislation revised the conforming loan limit system. Therefore, it can be reasonably argued that a reduction in limits is an appropriate and easily implemented policy lever to force the government agency’s market share back partially or fully into the 50% range, which will result in a decrease in taxpayer subsidies for more expensive housing. . As this would restore the government agency’s share closer to its historic pre-bubble norm, this is not really a fundamental advantage for the US owner.
While a reassessment is an interesting idea, given that the loan limits used by GSEs (as well as the FHA and VA) are incorporated into legislation, can it lead to a real overhaul without congressional passes new legislation, which is unlikely at this stage? time?
Although this is a widely held view, according to the Layton, an existing legal opinion states that the FHFA, acting as custodians of the GSEs, could in fact adjust loan limits, but only at the down, never up, because that would require new legislation.
“Although this was never acted upon, it is clear that a reassessment could produce a review without congressional action. However, given that the FHFA lost its regulatory independence last June via a decision of the Supreme Court, this now means the Biden administration is setting the tone for the GSEs, as it already is for the FHA and the VA, so the administration should be in favor of such a cut and it’s unclear When it comes to reducing FHA or VA limits, unfortunately, legislation is probably necessary.
Given the politicization of the US housing finance system, would any proposal to revise GSE loan limits survive lobbying by influential economic and ideological interest groups, or would it be a waste of time and effort?
The answer to this question is not so clear as there are the “usual suspects” who have long-held and predictable views that can make it difficult to promote this type of legislation. Layton says conservatives will always vote for cut limits, the mortgage industry itself would fight against a cut in limits because it would lead to less profit, while private label securitization would favor limits because it would put more deals in their pipeline.
But the views of liberal housing advocates are harder to pin down, and they are particularly influential with the Biden administration.
“But, the perspective of liberal housing advocates, who are particularly influential with the Biden administration, is harder to predict. On the one hand, they should favor lower limits so that GSEs subsidize the upper middle class less (i.e. reducing the “welfare of the well-off”), which would allow companies to concentrate more energy and subsidies on low-to-moderate income borrowers (LMI).
“On the other hand, GSEs cross-subsidize the pricing of their mortgage purchases, as higher-balance loans produce part of a subsidy pool that is then used to reduce the interest rate on mortgage loans to LMI borrowers; as such, liberal housing advocates might not support a reduction in the limit because it would reduce the pool of subsidies available. So how these defenders (who speak with many voices, not just one) would deal with this dilemma is unpredictable; perhaps a creative way could be found to reduce lending limits while protecting the bulk of cross-subsidies. This is where the value of a public reassessment could be, and which could also be key to the outcome.
What about the FHA? Should you also reassess your loan limits?
Layton said the FHA is still focused on low-to-middle income buyers and doesn’t seem to need a reassessment on the surface, but since the maximum loan amount is still approaching the $1 million mark, it still seems questionable for an agency that is supposed to focus on first-time buyers and borrowers
“This requires a reassessment to determine whether these high-balance borrowers deserve the significant taxpayer subsidy (which is even greater than that enjoyed by GSEs) contained in all FHA mortgage financing activities.”
Likewise, should there be a change in how the VA limits the dollar size of the mortgages it insures?
The VA is a different story because of how it funds mortgages. VA mortgages have no down payment requirement, and as of 2020 the upper limit was removed by Congress as an additional employee benefit for military personnel.
For Layton, the decision to remove this limit is difficult to understand.
“For the small number of veterans who become wealthy enough to afford such large mortgages (potentially millions of dollars), is it really good public policy for the taxpayer to subsidize them without limit, even while honoring their service? I know a few veterans who are wealthy and I don’t see them supporting such a grant for themselves. , a $5 million no down payment mortgage subsidized by taxpayers through the VA, so a reassessment should include putting a dollar limit on the size of VA mortgages, and it might even be generous to reflect that it is designed to be a benefit for veterans.
Layton concluded that with the upper loan limit reaching $1 million, now is a great time to review and re-evaluate loan limits, but does not see sweeping changes as the likely result of any consideration.
Click here to see Layton’s responses in full.