The maximum conforming loan limits for mortgages acquired by Fannie Mae and Freddie Mac has significantly from last year, per Federal Housing Finance Agency (FHFA) guidelines as shown in the table below.
The conforming loan limits (CLL) are established under the terms of the Housing and Economic Recovery Act (HERA), and are re-calculated each year. The law sets loan limits as a function of median home values in local areas.
Current FHFA Conforming Loan Limits
Given the rapid rise in home prices last year, during the quarter-to-quarter calculation period (see section below for details), conforming loan limits ballooned significantly again for 2023.
The conforming loan limit (CLL) in 2023 will rise to $1,089,300 in high-cost areas. This is a nearly $118,000 jump from the previous level. The standard/baseline CLL in other (lower cost) areas rose to $726,200. These reflected a 12.2% increase.
|CLL – High Cost Areas
|CLL – Other Areas
|CLL % Change
$1 Million CLL in 2023!
The latest increases have also drawn attention as the CLL for higher-cost areas has exceeded $1 million for the first time in history. This was thanks to historically low interest rates and fiscal stimulus that allowed a property bubble to be created in many areas.
In several high-cost coastal and capital cities, $1 million will get you a modest home. So the higher CLL is not surprising and does not look like coming down anytime soon.
Some conservative commentators are also arguing that with larger CLLs the U.S. Government and Taxpayer is essentially backstopping mortgages for the more affluent who live in high-cost housing areas in places like California, Boston and New York (which are also heavily Democrat leaning). They also argue the availability of “federally subsidized” mortgages also contributes to rising prices and inequality in asset wealth.
Supporters, like realtors and housing associations, support rising CLLs in high cost of living areas in order to keep pace with generally rising home prices (due to inflation they say), which helps address affordability in these counties.
Why is the FHFA Conforming Loan Limit (CLL) important?
The confirming limits are what retail lenders (e.g Wells Fargo, Bank of America, JP Morgan Chase) use when it comes to determining rates for new and refinanced mortgages on single family (one-unit properties) homes.
Mortgages that are under the CLL are called conforming loans, and normally come with more flexible down payment requirements and lower closing costs. Loans that exceed the CLL are known as jumbo mortgages and are generally not backed or bought by the government.
Generally, you will get a lower rate if your loan amount is below the confirming limit because the loans can be sold (secured) to or acquired by the two Government Housing Agencies (GSEs) – Freddie Mac or Fannie Mae. These agencies then package and sell these loans to investors (Securitization).
Why and How is the CLL Adjusted?
The CLL baseline is adjusted annually using a pre-defined U.S home price related formula as legislated under the the Housing and Economic Recovery Act (HERA).
A core component of this adjustment is based on the FHFA House Price Index® which includes statistics for the quarterly change in the average U.S. home price. The baseline CLL percentage change is based on the nominal, seasonally adjusted, average home price increase between the current and prior third quarters.
2023 CLL Adjustment
Nominal adjusted home prices increased 12.21 percent, on average, between the third quarters of 2021 and 2022. Therefore, the baseline CLL in 2023 will increased by 12.21%.
Due to rising home values, the CLLs in 2023 will be higher in 99.8% of U.S. counties (two saw no rise) as shown in the map below
High cost areas are those places where 115% of the local median home value exceeds the baseline conforming loan limit. This includes areas in and around Manhattan, San Francisco and Washington DC, where average home prices often exceed $1 million.
In these areas the applicable loan limit is set higher than the baseline/standard conforming loan limit, in order to allow borrowers to get confirming loans via the GSEs.
Based on HERA, the ceiling for for high cost areas will 1.5 times that of the baseline CLL. This is reflected in the table above.
Only around 100 counties and county equivalents, out of more than 3,000 across the U.S. are designated as high-cost markets.
Alaska, Hawaii, Guam, and the U.S. Virgin Islands also align to the high-cost CLL based on statutory provisions.
2024 CLL Forecast
While 2023 levels rose sharply, it is expected that 2024 levels will moderate and may even go down as higher interest rates and mortgage payments weaken demand for housing and push prices lower.
Further, with additional tech layoffs in California, where may High cost areas are located there is an expectation of much sharper price drops in those areas which may lower the overall national median home price.