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It was a mixed bag for home affordability in early 2024. See the income you need to buy a median-priced home in the top 50 metro areas for details.

It was a mixed bag for home affordability in early 2024. See the income you need to buy a median-priced home in the top 50 metro areas for details.

Should conforming loan limits be reduced?

Keith Gumbinger

With mortgage rates at multi-decade high levels and home prices near record highs, it might be an odd time to consider what an ever-rising conforming loan limit has meant to the mortgage market. After all, near- or record-high home prices by themselves suggest the need for a "standard" loan limit of $766,550 and a "high-cost area" extension that lifts this cap to as high as $1,149,825 -- don't they?

The question of whether or not to start to lower conforming loan limits isn't exactly a new one. At various points in time, there have been rumblings that the Federal Housing Finance Agency wanted to reduce conforming loan limits, obviously in hopes of starting to reduce Fannie and Freddie’s exposure and influence in the market.

The last time this idea was seriously considered -- now a decade ago -- there was pushback from the mortgage and real estate industry, and 66 members of the House of Representatives signed a letter calling for the FHFA to reconsider the move, openly questioning the authority of Fannie and Freddie’s regulator to make such a change.

Even as home prices have run to record levels in recent years they remain far below even the "standard" conforming limit of $766,550. At least at their recent peaks, median existing home prices topped out in June 2022 at $413,800 while median prices for newly-built homes peaked at $496,800 in October 2022. Certainly, the vast majority of homebuyers and refinancers fit comfortably under the "standard" limit.

Expanded limits were put into place in the Great Recession, when the financial market crisis toppled jumbo-lending banks and funding for those loans via securitization markets dried up. Simply put, there was no jumbo mortgage market at the time, so some homeowners and homebuyers couldn't find financing at any price.

Ask the Expert: What does the term "conforming" actually mean?

Can conforming loan limits be reduced?

It would take a new regulation or law to allow any downward change in the conforming loan limit.

Current regulation and law actually doesn't allow for conforming limits to be reduced even if home values decline; this was covered by the Housing and Economic Recovery Act (HERA) of 2008. Simply stated, when home values have declined according to the limit-setting formula, HERA does not provide for decreases in the baseline (current) loan limit. During the last period of soft home prices, the baseline loan limit value remained at $417,000 from 2006 until 2017, when home prices finally surpassed their collective previous high-water mark and it rose by 1.7%.

The private market needs to grow

Lowering the loan limits is an interesting idea, to be certain.

On one hand, regulators and industry participants alike have generally agreed that getting more private capital into the mortgage market is desirable.

It's worth considering that the jumbo (non-conforming) mortgage markets are where a lot of mortgage innovation has come from. Most typically, this has come at times when fixed interest rates are high, and private lenders are seeking as many ways as possible to make loans. The hybrid ARMs we know today grew out of one such episode, as did interest-only products (both fixed-rate and ARM) and even balloon-reset mortgages, where a borrower got a lower-than-market interest rate for five or seven years, then the loan reset to a new fixed-rate loan for 25 or 27 remaining years.

Many of these products proved so popular and successful that Fannie Mae and Freddie Mac actually began buying them, bringing them out of the smaller jumbo market into the mainstream to the benefit of homebuyers and homeowners.

So the private mortgage market -- the non-conforming market -- needs to be sizable enough as to have lenders look to take risks and innovate as they search for ways to serve more borrowers. Today, this market space is very small, providing little reason for lenders to try to develop new products and reach new audiences.

Consider this: If the size of the premium quality mortgage market is, say, $1 trillion, and Fannie and Freddie are garnering 80 percent of that, this only leaves 20 percent as a truly private mortgage market.

If the government does not reduce its share of the market, how will it be possible for private markets to grow in this confined space?

Related: See this year's conforming loan limits.

Re-expanding the private lending market

Certainly, we could grow the $1 trillion overall, but to expand the pie means easing credit standards to attract and serve more potential borrowers. In light of the housing market fallout from the last episode of lending to folks with lesser credit strength or employing loose underwriting standards, it is generally agreed that it is bad practice to do so. Today, given Ability-to-Repay (ATR) and Qualified Mortgage standards, this kind of expansion of credit availability is unlikely to happen.

If we are to try to get private money back into the market, and if private money will or can only presently serve “A” quality applicants, and if the market is of finite size (and the government is getting the lion’s share of it), the only way to expand private involvement is to reduce that of the public, so it must come from the top down.

Jumbos have come alive

You may or may not recall back in 2011 there were concerns that the market for certain borrowers would collapse when the “agency jumbo” limits were trimmed back from a then-maximum of $729,750 to $625,500 (and a number of areas were dropped from any form of expanded limits at all).

At the time, industry participants argued, and correctly so, that there were plenty of banks willing to jump into that fray and serve those highly desirable jumbo borrowers. In the aftermath of the change, the secondary market for jumbo mortgages was revived, and lenders became more willing to lend in these markets, since they and could do so again profitably.

This would very likely again be the case if conforming loan limits were reduced. It might be a start to begin to lower the limits in the "high-cost" areas, expanding the opportunities for private lenders to make loans and gauge how well the private market responds.

Related: See the history of conforming loan limits from 1980-now.

A change should happen

There's nothing to suggest that any changes to loan limits needs to be abrupt or disruptive; any changes could be gradual, allowing lenders and borrowers to adapt the changing environment. We might see more innovation in loans or lending, the kind that can help produce ways to keep the housing and mortgage markets moving even during times of high inflation or high interest rates.

Ever-rising and expanding conforming loan limits are really more about the availability of credit than the price of it. In fact, for a fair while, rates for private-market jumbo mortgages were below or at least no higher than those for traditional conforming loans. Certainly, if mortgage markets aren't functioning and credit for certain borrowers isn't available, temporary higher limits could be put in place to help liquefy markets again, but these needn't be permanent.

Now more than a decade past the worst housing crisis since the Great Depression, it's getting to be time to review and reconsider some of the policies put in place to address market conditions that probably don't exist anymore, and perhaps one of them is reducing conforming loan limits to help re-grow the private mortgage market again.

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