How the new limit plays out for buyers
With this adjustment, maximum price a buyer can spend with the minimum (3%) down payment changes from $467,113 up to $499,329. And buyers aiming to avoid MI and put 20% down, will seen their maximum price stretched from $566,375 up to $605,437.
These new limits apply to loans sold to Fannie starting January 1, 2019, so lenders should be able to offer the new limits pretty much immediately.
Less important today
Although the Fannie Mae loan limit is an important industry benchmark, it is not as critical today as it was a few years ago. Since the end of the mortgage crisis, “jumbo” and “non-conforming” loans (those above Fannie Mae limits) have proliferated.
The rates on jumbo loans, especially jumbo loans with 20% down or more, are often lower than Fannie Mae rates. Why is this? Fannie Mae (and its sibling entity, Freddie Mac) charge “Guarantee Fees” (g-fees) and “Loan Level Pricing Adjustments” (LLPAs). These fees are designed to absorb the projected costs to government agencies of defaults on loans sold to Fannie and Freddie.
Jumbo and non-conforming loans don’t have the same government guarantee. And arguably, regulators are using G-fees and LLPAs to make sure the marketplace for private sources of funding remain a viable alternative, nurturing a healthy marketplace for mortgages not backed by the government.
Playing catch-up
The 6.9% increase is fairly generous, outpacing the rate of appreciation over the past year. Per Case Shiller, homes appreciated at 5.5% between September 2017 to September 2018.
The increase slightly outpaces last year’s 6.8% bump; the limit went from $424,100 to $453,100 on January 2018. 2017 saw a paltry 1.7% increase. And that was on the heels of 11 years (11 years) with no increases. From January 1, 2006 to January 1, 2016 we were pinned at $417,000.
For you history buffs
Up until 2008, the conforming loan limit for each year was based on the average change in house price from October to October in the Monthly Interest Rate Survey completed by the Federal Housing Finance Board (FHFA). During the mortgage crisis the FHFA and Office of Federal Housing Enterprise Oversight (OFHEO) were merged to form the Federal Housing Finance Agency (FHFA).
On September 7, 2008, Fannie Mae and Freddie Mac were both placed into conservatorship under FHFA control (and despite rumblings that a change may come to pass, there they’ve remained). Had the FHFA followed the old formula, loan limits would have fallen during the mortgage crisis. The FHFA, however, elected to leave loan limits at $417,000, rather than reducing them and further undermining the struggling housing market.
For a little historical context, here are Fannie’s loan limits from 1980 until today:
What about VA & FHA?
Fannie Mae’s new loan limits impact veterans using their VA home loan guarantee. VA loans allow qualifying veterans to finance a home without a down payment up to Fannie Mae’s loan limit. Veterans can borrow over the Fannie Mae limit but must make a down payment when doing so. Down payment options start at 25% of the amount over $484,350.
FHA loan limits vary (quite widely) by county. Thus far FHA has not made any announcements about their loan limits for 2019. For the time being, in the Portland metro area, the FHA limits are $448,500 for a single family residence, $574,150 for a duplex, $694,000 for a triplex and $862,500 for a four-plex. But watch this space for updates. As soon as FHA announces next year’s loan limits I’ll post them here.
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