On November 29th, the Federal Housing Finance Agency (“FHFA”) announced that for 2023, baseline conforming loan limits for mortgages eligible for purchase by Fannie Mae and Freddie Mac will rise from $647,200 to $726,200, an increase of over twelve percent. For counties considered high-cost areas, the new ceiling will be as high as $1,089,300 (see map). Although the 2023 increase is less than last year’s eighteen percent rise, this is the first time that the federal government will back mortgages over $1 million.
Despite the headline-grabbing million dollar plus number that has been the focus of many press reports, the conforming limit of $1,089,300 for certain high-cost areas is merely indicative of the current housing costs in those markets (e.g., Los Angeles County, New York City). However, fewer than four percent of U.S. counties meet the “high-cost” threshold—including none in Texas—and most borrowers will be limited to the baseline conforming limit.
FHFA is required under the Housing and Economic Recovery Act of 2008 (“HERA”) to adjust loan limits annually to reflect average housing prices via a formula that compares home prices year-over-year. The increase for 2023 does not represent the government’s belief that home prices will continue to rise next year, but simply accounts for the average twelve percent increase in home prices across the country from Q3 2021 to Q3 2022.
Interestingly, since 2016, the conforming loan limit has increased almost 75%, which matches the increase in the median U.S. home price over that period. However, due to the lingering effects of the 2008 financial crisis, conforming loan limits did not increase at all from 2008 to 2016.
Because Fannie Mae and Freddie Mac purchase and securitize about 60% of all residential mortgages, adjustments made by FHFA to the conforming loan limits are commonly followed by private investors, so we expect almost all investors to raise their limits accordingly.
The increase in conforming loan limits potentially makes single-family homes more affordable for some, because conforming loans typically allow for smaller down payments and lower closing costs than non-conforming or jumbo, loans. However, any benefits in home affordability may be offset in 2023 by higher interest rates resulting from the Federal Reserve implementing four consecutive increases of 75 basis points.
If you have further questions regarding 2023 conforming loan limits or other questions regarding the contents of this alert, please reach out to one of our attorneys at: HTTP://WWW.MORTGAGELAW.COM/PEOPLE