Will Rising Conforming Mortgage Limits Cause Another Housing Crisis?

Will Rising Conforming Mortgage Limits Cause Another Housing Crisis?
Written by Publishing Team

Borrowing limits are set to increase. Will this cause buyers to step in over their heads?

Home prices have continued to rise since the beginning of the year, and they don’t seem to be slowing down. A big reason is that lower mortgage rates have fueled an increase in buyer demand. Meanwhile, limited inventory is forcing buyers to evade bids in wars, driving up property values.

Not surprisingly, home buyers are increasingly forced to take out larger mortgages to finance properties given today’s prices. Thus by 2022, the matching loan limits will be raised to account for these conditions.

Matching loans are those backed by Fannie Mae and Freddie Mac, the two government-sponsored entities that buy mortgages. It is possible to get a non-matching loan, but that usually means that you are stuck on a less expensive mortgage.

Every year, matching loans are put to an end. Currently, that limit is $548,250 in most parts of the country and $822,375 in high-cost areas. In 2022, these limits will rise to $647,200 and $970.800, respectively. But whether this is a good thing has yet to be determined.

Will higher loan limits cause borrowers to overspend?

You may remember the 2008 housing crisis that drove many homeowners into foreclosure and caused the property market to crash. One of the main reasons for the disaster was that too many borrowers took out mortgages they couldn’t afford, got left behind, and lost their homes in the process.

Since then, mortgage lenders have become stricter about screening home loan candidates. And they are becoming more conservative about the amount of money they will lend. But with loan limits set to rise, the fear is that, next year, borrowers will increasingly get over their heads.

Fortunately, we are not likely to witness a housing crisis like we did more than a decade ago when the housing bubble burst. Mortgage lenders have learned a lesson from those events and are likely to continue to maintain stricter requirements for borrowers across the board.

Moreover, the main reason many borrowers got into trouble again in 2008 was that they went underwater in their mortgages—a scenario that occurs when the market value of a home is less than the remaining mortgage balance. When that happens, selling a home out of a hard-to-keep mortgage isn’t an option. Many homeowners were forced into foreclosure in the absence of the ability to meet their mortgage obligations.

These days, home values ​​are skyrocketing. Even if borrowers get higher mortgages in the new year, they are unlikely to end up under water, at least not in the near term. To be sure, if home values ​​decline rapidly after their current peak, those conditions may change, and more homeowners may end up underwater in the coming years. But for the most part, it shouldn’t happen at nearly the same pace as it did in 2008 because today’s lenders typically require higher down payments than they did years ago.

Borrowers need to be careful

Of course, borrowers still need to proceed cautiously into the next year given the higher loan limits. But those who pay the 20% down payment will start with a decent amount of home equity which in turn will reduce the likelihood that they will end up underwater. That, combined with tighter lending practices, may be enough to prevent a crisis even as home values ​​plummet.

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