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In November, the Federal Housing Finance Agency reported its yearly change to the conforming loan limit for mortgages bought by Fannie Mae and Freddie Mac (GSEs).
For 2022, it was reported that the conforming loan limit expanded by 18% to $647,200, mirroring the normal increment of home values throughout the last year.
Yet, the loan limit is not the same throughout the country: starting in 2008, certain “High Cost” regions could see advances given for up to 150% of the baseline which comes to $970,800 in 2022.
As these credit limits approach $1 million, Don Layton, a Senior Fellow at the Joint Center for Housing Studies at Harvard University, says this brings up a central arrangement issue: “should the GSEs, which finance mortgages on favorable terms due to significant subsidies from the taxpayer, by doing so to benefit families who are wealthy enough to carry a million-dollar mortgage?”
To address this inquiry, Layton separates the frameworks that lead to the conforming rate limits being set by posing five inquiries to inform the discussion.
1. While $1 million is an eye-getting number, the pattern and significant expense region roof computations basically reflect amazingly high house value development as of late, which is by all accounts precisely the way that as far as possible framework should work. Wouldn't any decrease of the cutoff points hence be an action item from the American property holder?
“When considering solely the conforming loan limits, this is a valid viewpoint. However, those limits do not exist in isolation, and the totality of factors driving how much the government supports and subsidizes home mortgages has evolved to push up the percentage of new mortgages that are financed by the four government agencies to high levels in recent years,” Layton wrote.
“Specifically, the four-agency cumulative market share averaged almost 55% from 2001 to 2003, which is seen as a relatively normal period not distorted by the bubble that was just beginning.
More recently, the share has averaged about 70% from 2014 to 2019, when the dislocations of the bubble bursting were mostly in the past, and so this higher percentage seemed to represent a ‘new normal.’”
“This large market share increase stemmed primarily from the collapse of the private label (i.e. not government-supported) securitization market, which became particularly uncompetitive after its weaknesses were revealed in 2007-08, and secondarily by less dedication of bank balance sheets to first mortgages.
Interestingly, this market share loss was replaced almost wholly by the FHA and VA, and not the GSEs, in part because the loan limits of the former increased relative to the latter after the bubble burst.”
“That 70 percent range is an extraordinarily high level and I do not believe was ever contemplated when the 2008 legislation revised the conforming loan limit system.
Therefore, it can reasonably be argued that a reduction of the limits is an appropriate and easily-implemented policy lever to force the government agency market share partially or wholly back down to the 50 percent range, leading to fewer taxpayer subsidies for higher-priced homes.”
2. While a reassessment is an intriguing thought, since as far as possible utilized by the GSEs (just as the FHA and VA) are epitomized in regulation, would it be able to prompt a real correction without Congress passing new regulation, which is a far-fetched result as of now?
“This is a widely held view,” Layton wrote. “However, during 2013, when the FHFA was led by Acting Director Edward DeMarco, he obtained an opinion from the FHFA legal staff that the agency, acting as the conservator of the two GSEs, could set the loan limits lower than the formula called for in the legislation, but never higher.
While this was never acted upon, it makes clear that a reassessment could produce a revision without congressional action.
However, given that the FHFA lost its regulatory independence last June via a Supreme Court ruling, this now means that the Biden administration is calling the shots at the GSEs, as it already does at FHA and VA.
Therefore, the administration would need to be supportive of such a reduction and it’s not clear that it would be. When it comes to reducing FHA or VA limits, unfortunately, legislation is likely required.”
3. Given the politicization of America's lodging finance framework, would any proposed update of the GSE credit limits endure campaigning by powerful financial and philosophical vested parties, or would it be an exercise in futility and exertion?
“I have heard senior FHFA officials over the years express their frustration with the process of getting public feedback on any proposal, as it is typically dominated by the “usual suspects” expressing long-held, predictable views.
I would almost expect that to be true in this case:
(i) conservative think tanks would strongly support a reduction in the GSE limits in line with their longstanding view that any reduction in the GSE footprint is a good idea;
(ii) the mortgage banking industry (both banks and non-banks) would fight any reduction in the limits as it would lead to less profit for their members, although there may be dissenting views from some bank lenders, and
(iii) the private-label securitization (PLS) industry would be in favor of a reduction as it would lead to more volume passing through its hands and thus more profits.”
But Layton goes on to say that the much more liberal opinions of housing advocates and the current administration are quite a bit harder to predict.
“On one hand, they should be supportive of lower limits so the GSEs would subsidize the upper-middle classless (i.e. reducing ‘welfare for the well-off’), which would, in turn, allow the companies to focus their energy and subsidies more on low- and moderate-income (LMI) borrowers.
On the other hand, the GSEs cross-subsidize the pricing of their mortgage purchases as higher-balance loans produce part of a subsidy pool that then is used to reduce the interest rate on mortgages to LMI borrowers; as such, liberal housing advocates might not support a limit reduction because it would shrink that pool of available subsidies.”
4. Shouldn't something be said about the FHA? Should its advance cutoff points be reconsidered too?
“FHA loan limits only partially mimic those of the GSEs. Basically, the FHA sets a loan limit for each specific geographical area (mostly counties) at 115% of the local median sale price of homes.
There is a floor on how low the limit can be, which is equal to 65% of the GSE baseline loan limit (now $420,680) and a ceiling set at the GSE high-cost area limit (now $970,800).
So, the FHA at its core is clearly focused on its target market of LMI borrowers, which is appropriate, and does not appear to need a reassessment.”
“However, the maximum (for the limited number of geographies that qualify) is still almost $1 million, which seems especially questionable given that the raison d’être of the FHA is to focus on first-time homebuyers and families with more marginal creditworthiness.
This calls for a reassessment as to whether such high-balance borrowers deserve the large taxpayer subsidy (which is even larger than that enjoyed by the GSEs) contained within all FHA mortgage financing activities.”
It should be noted that Alaska, Hawaii, Guam, and the Virgin Islands have higher loan limits as prescribed to them by law.
These special limits are set at $1.5 million. These special exemptions should be considered by any overall reassessment of current limits.
5. Also, would it be a good idea for there to be an adjustment of how as far as possible the dollar size of the home loans it guarantees?
“The VA operates much like the FHA in how it finances mortgages, except that some features are more generous to veteran-borrowers (e.g. allowing zero downpayments, versus the FHA’s 3.5% minimum) as a way for Congress to deliver fringe benefits for their military service.”
In 2019, Congress signed the Blue Water Navy Vietnam Veterans Act of 2019 into law which removed the upper limit on VA-backed loans meaning there is now no limit on the amount a veteran can take out toward home, still with zero down payment.
“This is curious and difficult to understand. For the small number of veterans who become wealthy enough to afford such large mortgages (potentially millions of dollars in size), is it really good public policy for the taxpayer to subsidize them without limit, even while respecting their military service?
I know a few veterans who are wealthy and I cannot see any of them supporting such a subsidy for themselves.
And it would undoubtedly be a scandal if it became publicly known that a very wealthy veteran received, for instance, a taxpayer-subsidized $5 million, zero-down payment mortgage through the VA.
Thus, a reassessment should include putting a dollar limit on the size of VA mortgages, and it could even be a generous one to reflect that it is designed to be a fringe benefit for veterans.
Layton concluded that due to the upper limit of loans reaching $1 million, this is a prime time to examine and reassess loan limits, but does not see sweeping changes being likely.
“Instead, I see there is a narrow window for a few modest but well-chosen revisions within the existing framework:
(i) for the GSEs, either reduce the limits modestly (e.g. 20%) or institute a cap (at a number under $1 million), while protecting the majority of the cross-subsidies that go to LMI borrowers;
(ii) for the FHA, have a similar reduction or cap;
(iii) for the GSEs and FHA, reduce some of the special treatment given to Alaska, Hawaii, Guam, and the Virgin Islands; and
(iv) for the VA, cap the now-unlimited amount allowed, but at a generous level to reflect that its borrowers are veterans.”
Reference Source: Mreport
