Government LendingMortgageOrigination

Conforming loan limit jumps: government will back loans over $1M

Fannie Mae and Freddie Mac will buy mortgages over $1 million in some high-cost areas

The Federal Housing Finance Agency (FHFA) on Tuesday announced that the baseline conforming loan limit for mortgages backed by Fannie Mae and Freddie Mac in 2023 will be $726,200, an increase of 12.21%, or $79,000, compared to 2022. 

Through the government sponsored enterprises, the federal government for the first time ever will back mortgage loans north of $1 million, with the new ceiling loan limit for one-unit properties in designated high-cost areas at $1,089,300 — or 150% of $726,200.

Special statutory provisions establish different loan limit calculations for Alaska, Hawaii, Guam, and the U.S. Virgin Islands. In these areas, the baseline loan limit will also be $1,089,300 for one-unit properties.

The FHFA’s conforming loan limit increase is based on a formula related to home prices.

The FHFA determines the conforming loan limits after data on home prices is in for the third quarter, with the regulator comparing home prices year over year and adjusting the limit by the corresponding amount. The ceiling doesn’t drop even if home prices fall, but it does rise if home prices are up year over year.

House prices increased 12.21% on average between the third quarters of 2021 and 2022, thus increasing the baseline conforming loan limit in 2023 by the same percentage, the FHFA said in a statement Tuesday.

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The conforming loan increase will help buyers more easily finance one-unit homes at the higher end of the price scale, even with home prices remaining stubbornly high. It will also reignite further debate about whether the government should be backing mortgages as high as $1 million.

In 2022, the FHFA set the baseline conforming loan limit at $647,200, a 18% increase from the prior year. Over the past six years, the baseline loan limit for Fannie and Freddie-backed mortgages has risen $302,100.

Desperate for volume in a high-rate environment, multiple nonbank lenders jumped the gun in raising conforming limits on agency-eligible mortgages ahead of the FHFA’s formal announcement.

Rocket Mortgage, America’s second-largest lender, was first to raise limits in early September, pushing the conforming ceiling to $715,000 through its wholesale arm. Rival United Wholesale Mortgage, the nation’s largest lender, followed shortly thereafter, as did Pennymac, Finance of America Mortgage (now defunct) and wholesaler Homepoint.

It was hardly a surprise that lenders would increase loan limits ahead of the FHFA’s November announcement, though they did so earlier than in years past. In 2021, when rates were still in the low 3% range, lenders didn’t raise anticipated conventional loan limits until early October.

The Housing and Economic Recovery Act in 2008 established a formula for increasing conforming loan limits for Fannie Mae and Freddie Mac. The law mandated that the baseline could only rise after home prices returned to pre-recession levels.

That condition was met eight years later in 2016 when the FHFA increased conforming limits for the first time in a decade.

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