Higher loan limits for Fannie Mae and Freddie Mac unnecessarily expand the government-backed mortgage giants’ footprints into markets better served by private lenders — and detract from their mission of supporting housing affordability, according to one of the nation’s biggest issuers of private-label mortgage backed securities.

Redwood Trust, which issues “jumbo” loans that are off limits to Fannie and Freddie, made the determination this week in a critique titled, “Perspectives on GSE Conforming Loan Limits,” that’s sure to make waves among lenders.

“At the new higher limits, Fannie and Freddie will be assuming risk on mortgages to homebuyers with incomes well in excess of the national median, and in many cases well above the median in their own neighborhoods,” Redwood Trust said in the new commentary.

Because home prices have soared during the pandemic, Fannie and Freddie’s baseline conforming loan limit is going up by 18 percent next year, to $647,200 in most areas of the country. In about 100 counties where home prices are particularly elevated, the conforming loan limit will be close to $1 million.

In Ventura County, California, for example, a household making the $91,446 median income wouldn’t be able to qualify for a mortgage bigger than $415,000, assuming a “reasonable” debt-to-income ratio of 40 percent, Redwood Trust said.

To qualify for an $851,000 mortgage — the new 2022 conforming limit for Fannie and Freddie in Ventura County — a borrower would need $186,120 in income, more than twice the median.

Next year, the analysis notes, Fannie and Freddie will also be backing mortgages to borrowers earning twice the median income in King County, Washington, and Fairfax County, Virginia.

Income required to qualify for a mortgage at 2022 conforming loan limit

Source: “Perspectives on GSE Conforming Loan Limits,” Redwood Trust.

Redwood Trust maintains that the new limits “appear at odds” with affordable housing goals proposed this summer by the Federal Housing Finance Agency, Fannie and Freddie’s regulator. FHFA proposed that at least 35 percent of the purchase mortgages backed by Fannie and Freddie should be taken out by low- and very-low income borrowers, up from 30 percent today.

FHFA’s proposed housing goals for Fannie Mae and Freddie Mac

FHFA Acting Director Sandra Thompson has made it clear she’s aware that Fannie and Freddie are being pulled in different directions.

“FHFA is actively evaluating the relationship between house price growth and conforming loan limits, particularly as they relate to creating affordable and sustainable homeownership opportunities across all communities,” Thompson said when the new loan limits were announced.

The agency has suggested that its hands are pretty much tied when it comes to conforming loan limits, because it’s following direction from Congress. FHFA points to the Housing and Economic Recovery Act of 2008 (HERA) as guiding its methodology, which “requires that the baseline conforming loan limit for [Fannie and Freddie] be adjusted each year to reflect the change in the average U.S. home price.”

But Redwood Trust maintains that the conforming loan limit represents a “maximum, not a mandate.”

Before the 2007-09 financial crisis and recession, “the executives at Fannie Mae and Freddie Mac maintained discretion to reduce those limits for risk-based or other business reasons,” Redwood Trust asserts. Now that Fannie and Freddie are in conservatorship, that “discretion” has been transferred to FHFA, the company says.

That horse has probably left the barn, for 2022 at least, since many lenders are already offering conforming loans up to the new limits, announced Nov. 30. The Federal Housing Administration has also published FHA loan limits for 2022, which employ minimum floor and maximum ceiling limits based on the conforming loan limit set by FHFA for Fannie and Freddie.

FHA loan limits are determined by metropolitan statistical area and county, and are generally equal to 115 percent of the median home price for each market, up to a 2022 ceiling of $970,800, which is 150 percent of the conforming limit. The minimum floor in low-cost areas will be $420,680 next year, or 65 percent of the conforming loan limit.

But from the perspective of private lenders like Redwood Trust, there’s no reason for the government to continue to subsidize the upper end of the housing market.

“Private capital has demonstrated the ability to fill gaps when [Fannie and Freddie’s] footprint is reduced and do so with no discernible impact in borrower interest rate or process efficiency,” the company maintains.

Redwood Trust points to growing demand for jumbo mortgages, which can offer competitive rates that, for some borrowers, can be even lower than conforming loans eligible for purchase by Fannie and Freddie.

There’s also the role private lenders played when FHFA placed a temporary 7 percent cap on Fannie and Freddie’s purchases of mortgage secured by second homes and investment properties.

The caps — originally intended to help the mortgage giants raise the capital needed to exit conservatorship — were instituted in April and May, and rescinded in September, after the National Association of Realtors and other real estate industry groups complained about their effects.

When the caps were instituted, there was a “substantial increase” in private-label securities backed by non-owner occupied homes, “which was easily absorbed by the market,” Redwood Trust claims.

However, an analysis by Black Knight found that, initially at least, the caps made it harder for lenders to sell loans backed by second homes and investment properties in secondary markets.

If FHFA were to conclude that it has the discretion to reduce conforming limits for risk reduction or other business reasons, as Redwood Trust maintains, it would undoubtedly raise the ire of NAR and state Realtor associations whose members serve high-cost markets.

In a statement commending FHFA for raising maximum conforming loan limits in high-cost markets to $970,800, the California Association of Realtors said the state’s “taxpayers and households should have the same equal access to safe and affordable capital that Fannie Mae, Freddie Mac, and FHA loans provide as any other state.”

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Email Matt Carter

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