Fannie Mae and Freddie Mac Increasing Loan Limits:

Fannie and Freddie Raise 2023 Mortgage Limits to New Highs

Recently, the Federal Housing Finance Agency (FHFA) announced that mortgage giants Fannie Mae and Freddie Mac would be raising the limits of government- backed loans to a record level for 2023.  The maximum loan limit for high cost areas will be more than $1 million.

The new baseline conforming loan limit for 2023 will rise by $79,000 from $647,200 to $726,200.  The loan limit in higher cost areas such as San Francisco, New York and Washington will rise from $970,800 to $1,089,300.

What are conforming loan limits?

These loan limits are the maximum borrowing amount (not the purchase price) allowed by Fannie Mae and Freddie Mac for a single unit purchase.  Loans made above these amounts are known as “non-conforming” or “jumbo” mortgages and as such, typically attract higher interest rates.

By raising the mortgage limits, the borrower is now able to secure a higher loan amount without attracting the additional costs associated with jumbo mortgages.  

Who are Fannie and Feddie.

Fannie Mae (Federal National Mortgage Association - FNMA) and Freddie Mac (Federal Home Loan Mortgage Association - FHMLC) are both government sponsored  enterprises.  These companies back around 50% of all US mortgages but they are not lenders themselves.  

Instead, Fannie and Freddie borrow money at low rates in the money markets.  They then invest this money through the purchase of loans which it then packages into mortgage backed securities (MBS).  These securities are then sold on to other investors.

This business model results in cheaper rates for lenders and ensures the availability of relatively affordable credit to consumers.

Why are the loan limits rising?

While house price increases are decelerating due to rising mortgage rates, they still rose 12.21% in the third quarter of 2022.  The FHFA’s division of research and statistics noted that the slowdown in house price increases is  quite widespread with approximately a third of states recording annual growth below 10%.

These continued (if slower) price rises mean that the new loan limits are great news for homebuyers,  especially for those in high cost areas.  In these locations, many buyers have been pushed into the more expensive jumbo mortgages even for properties at the lower end of the price range.

How are the rates calculated?

The FHFA reviews the loan limits on an annual basis and considers how much home prices have increased during the previous 12 months.  The maximum loan limit in high-cost areas is set at a multiple of the area’s median home value, up to a maximum of 150% of the baseline loan limit.

High cost areas include Silicon Valley, San Francisco as well as Washington DC and New York City.  A map showing how the loan limits vary by geography can be found on the FHFA website and is included here.

The FHFA does not propose decreases in loan limits.  Rather, they allow limits to remain unchanged and simply adjust them again when prices rise past previous levels.  For example, loan limits remain unchanged from 2007 until 2017 following the housing crash.

Summary

The increase in the loan limits is good news for homebuyers, especially those in high cost areas.  They will enable more homebuyers to take advantage of Fannie Mae and Freddie Mac Financing without attracting the higher associated costs of jumbo mortgages.