Government-sponsored enterprises (GSEs) include Fannie Mae and Freddie Mac, and these companies have an essential role in the housing market. They buy mortgage loans from private lenders and then sell them to investors. Mortgage loan securities are then sold again on a secondary market.
Lenders take on less risk when their loans can be resold to Fannie Mae and Freddie Mac, so they are willing to make home loans to borrowers even if their credentials aren't perfect. In addition to offering lower interest rate loans, they also provide short-term loans.
A loan of less than $1 million may be considered a conforming loan. Freddie Mac and Fannie Mae repurchasing loans are designed to make housing more affordable for average Americans. Consequently, these GSEs will only guarantee loans up to a certain amount. Conforming loans are those that fall below these limits, while nonconforming loans are those that exceed them.
In some cases, Fannie and Freddie may even back loans valued at close to $1 million next year, as conforming limits increase dramatically.
The reason is as follows:
In 2021, the maximum loan limit
By 2021, the maximum loan limit for a conforming loan backed by Fannie Mae and Freddie Mac will be $548,250 in most of the United States. Nevertheless, the limit is higher in some expensive housing markets, including New York and California. In 2021, it will be $822,375.
Federal Housing Finance, which oversees Fannie Mae and Freddie Mac, has not yet announced the new limits on conforming loans. House prices have risen by 18.5% since last year, according to the FHFA's House Price Index.
By this metric, the new limit in the majority of the United States would be $650,000. The figure would rise as high as $975,00 in areas with expensive home prices. Based on these numbers, some lenders have already adjusted their loan offers, and the official announcement is expected in the near future.
There is good news for people in high-cost areas who are now eligible for a home loan at a lower rate if they qualify for a conforming loan. Still, there are also some questions about whether the government should be helping people buy homes valued at close to $1 million. Only wealthy Americans could afford properties at this price point.
If the administration does not feel it is appropriate to ask taxpayers to support such high-cost homes, the FHFA can deviate from the standard formula to raise loan limits.