For the first time since 2006, the conforming loan limit will rise in 2017. This change is important in today’s housing market as it allows the financing market to expand to meet the growing needs of strong consumer demand and rising home prices. Furthermore, while the conforming limits will rise, this change is unlikely to adversely impact private financing.
Fannie Mae and Freddie Mac (the GSEs) as well as the Federal Housing Administration (FHA) are limited in the size of loans that they can help finance. The maximum loan size that the GSEs can finance, also known as the conforming loan limit, is determined by the Federal Housing Financing Agency (FHFA), while the FHA determines its own limit. Loans made above the limit are called jumbo or non-conforming and are either held in bank portfolios or are packaged into private mortgage backed securities (PLS) and sold to investors.
The current conforming loan limit at the GSEs will rise from $417,000 to $424,100 in 2017, while the super conforming limit which governs 238 counties, will increase from $625,500 to $636,150. The super conforming limit applied to 234 counties in 2016, but will impact 238 in 2017 as 4 counties migrated above the $424,100 threshold including Solano county in California along with Lincoln, Logan, and McPherson counties in Nebraska. However, nine fewer counties are at the super conforming limit. The FHA limit is expected to be raised as well from $271,050 to $275,665. A full list of the new limits is available on the FHFA’s website.
Geographically, the higher conforming limit will have an impact on every county in the United States. As depicted in the map below, the high cost areas remain most prevelant on the coasts, in large metro areas, and in mountain areas like Denver and Boulder. Furthermore, while the national conforming limit rose by $7,100 and the super conforming rose by $10,650, 131counties have limits between these levels and 48 of these will experience larger changes. Denver for instance will see an increase of $34,500 to $493,350, while Boston will see the largest increase at $74,750 to $589,000. The 82 remaining counties were unchanged and one rose just $2,300. A list of counties with the largest changes is included at the end of this article.
Credit conditions in the jumbo market have been tight for several years requiring high down payments, high credit scores, and low debt-to-income ratios. The FHA and GSEs allow for down payments as low as 3 percent and for higher back-end debt-to-income ratios than the strict 43 percent limit that is maintained in the jumbo sector.
At the same time, it is cheaper to borrow in the jumbo space, so those borrowers who qualify tend to choose jumbo loans. As home prices rise, borrowers without pristine credit could be forced to put down larger down payments, take out piggy-back loans, or they could get pushed out of the market all together. Consequently, the FHFA’s actions will allow the housing finance market to accommodate an expanding housing market without impacting private financing.
The change to the conforming limit could expand access to additional buyers, though. One group estimates that a $10,000 increase in the limit could result in an additional 40,000 sales based on historic market shares.
The FHFA’s change marks the first new conforming limit in a decade. It puts an exclamation mark on housing market’s recovery, but more importantly it paves the way for continued expansion.