In November, a Federal Housing Finance Agency announced its annual change to the loan matching limit for previously purchased loans Fannie Mae And Freddy Mac (GSEs). For 2022, the cap has been announced to increase by 18% to $647,200, reflecting the average increase in home prices over the past year.
But the matching loan limit doesn’t apply to the entire country equally: Starting in 2008, certain “high-cost” areas could see loans issued up to 150% of the $970.800 baseline in 2022.
Since these loan limits are close to $1 million, Don Layton, first colleague at Joint Center for Housing Studies At Harvard, he says this raises a fundamental policy question: “Should public education institutions, which finance mortgages on favorable terms because of significant taxpayer subsidies, do so to benefit families wealthy enough to afford a million-dollar mortgage?”
To answer this question, Leighton breaks down the systems that lead to setting match rate limits by asking five questions to better enrich the discussion.
1. While $1 million is a striking number, the high-cost baseline and acreage ceiling calculations simply reflect very high home price growth in recent years, which appears to be exactly the way a loan limit system should work. Wouldn’t any lowering of limits be a quick benefit to the American homeowner?
“When looking only at matching loan limits, this is a valid point of view. However, these limits do not exist in isolation, and the totality of factors driving the extent of government support and subprime mortgages has evolved to raise the proportion of new mortgages funded by the four government agencies to high levels. In recent years, Layton writes, “Specifically, the cumulative four-agency market share averaged approximately 55% from 2001 to 2003, which is seen as a relatively normal period not distorted by the just beginning bubble. More recently, the share averaged around 70% from 2014 to 2019, when disruptions from bubble bursting were mostly in the past, and so this higher percentage seemed to represent a “new normal”.
“This significant increase in market share arose primarily from the collapse of the private brand (i.e., not subsidized by the government) in the securitization market, which became particularly uncompetitive after its weaknesses were revealed in 2007-08, and secondly due to the reduced dedication of budgets Banks for first mortgages. Interestingly, this loss of market share has been almost entirely replaced by FHA and VA loans, not by GSE dues, in part because previous loan limits increased compared to the latter after the bubble burst.”
“The 70 percent range is extraordinarily high and I don’t think it was ever thought of when the 2008 legislation revised the matching loan limit system. Therefore, it can reasonably be said that lowering the limits is a convenient and easy-to-implement policy lever to force market share for government agencies. Partially or fully, it will be possible to fall back to the 50 percent range, reducing taxpayer subsidies for higher-priced homes.”
2. While reassessment is an interesting idea, since loan limits used by GSEs (as well as FHA and VA loans) are included in the legislation, it can lead to an actual review without Congress passing new legislation, an unlikely outcome at this time?
“This is a widely held view,” Leighton wrote. However, during 2013, when FHFA was managing Acting Administrator Edward DeMarco, he obtained an opinion from the FHFA legal staff that the agency, as custodian of the GSES, could set loan limits lower than the wording required in the legislation, but not higher While this was never acted upon, it does make clear that a reassessment can result in a review without action from Congress.However, given that the FHFA lost its regulatory independence last June through a Supreme Court ruling, it now means that the administration of Biden makes decisions in the GSEs, as it already does in the FHA and VA. Therefore, the administration should be supportive of such a reduction and it is not clear that it will be. When it comes to lowering FHA or FHA limits, unfortunately, it is likely Legislation is required.”
3. Given the politicization of America’s housing finance system, would any proposed revision of the GSE loan limits survive pressure from influential economic and ideological interest groups, or would it be a waste of time and effort?
“I have heard senior FHFA officials over the years express their frustration with the process of obtaining public comment on any proposal, which is usually dominated by ‘usual suspects’ expressing long-standing and predictable views. I would mostly expect that to be true in this case. : (1) Conservative think tanks will strongly support lowering GSE limits in line with their long-held view that any reduction in the GSE footprint is a good idea; (2) the mortgage banking industry (both bank and non-banking) will fight any reduction in limits because it will lead to a lower profit for its members, although there may be dissenting opinions from some of the bank’s lenders, and (3) the private sector will support the PLS industry reduction as it will lead to more volume passing through its hands and thus more profits.”
But Layton goes on to say that the more liberal views of housing advocates and the current administration are hard to anticipate.
“On the one hand, they should be supportive of the bottom line, so public support institutions will support the upper middle class to a lesser extent (i.e. reduce ‘well-being for the rich’), which in turn will allow companies to focus their energy and support more on low- and middle-income (LMI) borrowers. On the other hand, GSEs subsidize the pricing of their mortgage purchases as higher-balance loans produce a portion of the support pool which is then used to lower the interest rate on LMI borrowers’ mortgages; as such, they may not Liberal housing advocates support the specific reduction because it will reduce the range of available benefits.”
4. What about FHA? Should his loan limits be reassessed, too?
“The FHA loan limits only partially mimic those of higher education institutions. Basically, the FHA sets a loan limit for each specific geographic area (mostly counties) at 115% of the local median home sale price. There is a lower threshold limit, which equals 65% of the GSE baseline loan limit (now $420,680) and a cap set at the GSE high cost area limit (now $970.800). Therefore, FHA at its core is clearly focused on the target market for LMI borrowers, which is convenient and does not appear to need reassessment.”
However, the cap (for a limited number of eligible geographies) remains close to $1 million, which seems particularly questionable given that the FHA’s raison d’être is to focus on first-time homebuyers and marginal creditworthy households. This calls for a reassessment of whether these high-equity borrowers deserve the significant taxpayer subsidy (and even greater than that enjoyed by GS) contained in all FHA mortgage financing activities.”
It should be noted that Alaska, Hawaii, Guam and the Virgin Islands have higher loan limits as provided by law. These special limits are set at $1.5 million. These special exemptions must be considered through any comprehensive reassessment of existing boundaries.
5. Likewise, should there be a change in how the VA sets the dollar amount of the mortgages it secures?
“The VA works like the FHA in how it finances mortgages, except that some features are more generous to veteran borrowers (eg not allowing a down payment, as opposed to a 3.5% minimum for FHA) as a way for Congress to provide additional benefits to their military services.”
In 2019, Congress signed the Vietnam Veterans Blue Water Act of 2019 into law that removed the upper limit for VA-backed loans meaning there is now no limit to the amount a veteran can get from home, with no down payment.
“This is intriguing and hard to fathom. For the small number of veterans who have become wealthy enough to take on such large mortgages (which could run into millions of dollars), is it really good public policy for taxpayers to support them infinitely, even with respect for their military service? ?I know a few wealthy veterans and can’t see any of them support such support themselves. It would undoubtedly be scandalous if it became known that a very wealthy veteran received, say, a taxpayer-backed mortgage of $5 million, with no down payment Through the VA. Thus, the revaluation should include a dollar cap on the size of VA mortgages, and it can be a generous idea to reflect that it is designed to be a marginal advantage for veterans.
Layton concluded that given the maximum loan limit of $1 million, this is a prime time to check and reassess loan limits, but does not see the potential for systemic changes.
Instead, I see a narrow window for some modest but well-chosen revisions within the current framework: (1) For GSEs, either lower the limits modestly (eg 20%) or cap them (at a number under 1 million) dollars), while protecting the majority of cross-subsidies that go to LMI borrowers; (2) for FHA, they have the same reduction or cap; (3) for Common Ground Institutes and FHLs, limiting some of the special treatment accorded to Alaska Hawaii, Guam, and the Virgin Islands; and (4) for the VA, cap the unlimited amount now allowed, but at a generous level to reflect that the borrowers are veterans.”