Should FHFA buck tradition when setting 2023 conforming loan limits?

On November 30, 2021 the Federal Housing Finance Agency announced the conforming loan limits (CLLs) for mortgages acquired by government-sponsored enterprises Fannie Mae and Freddie Mac in 2022.  The CLLs are the maximum dollar amounts (unpaid principal balances or UPBs) for mortgages which the enterprises can acquire in a given year. 

The 2022 CLL for one-unit properties in most of the country in 2022 is $647,200, an increase from $548,250, or 18.05%, from 2021. There are higher CLLs for multi-unit properties: in 2022, $828,700 for two-unit properties; $1,001,650 for three-unit properties; and $1,244,850 for four-unit properties. There were also loan limits for multifamily (five or more units) properties prior to 2009, but these were repealed by law in October 2008.

We now have FHFA home price data through May 2022 — 8 months since the third quarter of 2021. The May index was 14 percent above the average for the third quarter of 2021. Thus, if there is no change in home prices between May and the third quarter of 2022, the CLL would rise by 14 percent, to more than $735,000.  However, some forecasters believe house prices will increase less rapidly than in the recent past or actually decline in future months. 

For example, in their July forecast, the Mortgage Bankers Association predicts a decline in the median price of both existing and new homes in the third quarter, which would be the first decline since 2012.  The FHFA price index for the third quarter of 2022 could be an estimated 8 percent above the index for the third quarter of 2021, in which case the CLL for 2023 would be about $700,000, with the CLL for high-cost areas rising to $1.05 million.

In light of the large increase in the CLL in 2022, some policymakers believe that the limits, especially the high-cost areas limits, are “too high,” given the Enterprises’ responsibility to serve lower-income borrowers. 

For example, at a July 20 hearing, Congressman Andy Barr (R-KY) asked FHFA Director Sandra Thompson if FHFA should “reevaluate the 2022 update to the conforming loan limits to ensure Fannie and Freddie are serving low and moderate income individuals.” 

Director Thompson responded that “this is a statutorily required calculation… and we are following the law and the statute as written.”  In actuality, the law establishes the procedure for setting the maximum limits; in principle, the director could set the limits below these maximum levels, though no director has done so and it is not clear what the basis for specific such lower limits would be.

The annual adjustments to the CLLs are currently based on a house price index produced by FHFA. They are based on repeat sales of single-family properties whose mortgages have been purchased or securitized by Fannie Mae and Freddie Mac. There are monthly and quarterly purchase-only indexes, based on data on prices for home purchase mortgages. There is also a quarterly all-transactions index, which includes prices from appraisal data obtained by the Enterprises. And finally, there is a quarterly expanded-data index, which adds transactions from FHA and county recorder data.

FHFA uses the expanded-data home price index for adjusting the CLL. Specifically, if home prices increase, the CLL for a given year is obtained by increasing the CLL for the preceding year by the change in the expanded-data index between the third quarter of the second preceding year and the third quarter of the preceding year. For example, the CLL for 2022 was obtained by increasing the CLL for 2021 based on the 18.05 percent change in this price index between the third quarter of 2020 and the third quarter of 2021. 

While Congressman Barr did not propose any specific alternative procedure for setting the loan limits director Thompson said “we’re happy to work with you all if you’d like to change it or tweak it,” suggesting FHFA’s openness to modifying the current procedure.