Conforming Loans in Real Estate

It begins with the innocuous Federal Housing Financing Agency announcement yesterday as of this writing (link here), which governs Fannie Mae, and Freddie Mac, the government-backed lenders you know.  Currently, the US government agencies of Fannie Mae or Freddie Mac buy mortgage loans from Banks post-closing.  There is a cap to the loan size the agencies will buy before a Bank has to hold the loan or the risk on their own balance sheet.  The maximum loan sizes are split into two categories: conforming and high balance conforming.

Both are increasing their loan limits, because homes have appreciated in value over the last 2 years.

The limit in most places for a conforming loan is currently $647,200.00.  Any loan up to that amount gets sold to one of the agencies.  That loan size Banks must follow the governments underwriting rules and interest rate pricing.

However, New York City is not most places; here, they have a special increased limit for big-ticket areas like NYC.  This is from the press release yesterday:

Median home values generally increased in high-cost areas in 2022, which increased their CLL.
The new ceiling loan limit for one-unit properties will be $1,089,300, which is 150 percent of $726,200.

What this means in New York is that any property for which a buyer is taking a nearly $1.1mm loan will be subject to the underwriting rules of these GSE’s- and the rates will also be affected.  The second conforming loan size, high balance came out of the housing crisis under President Obama for high housing cost areas.  The loan size is anywhere from $647,201.00 up to $970,800.00.

The 2023 conforming limits are going from $647,200.00 up to $726,200.00 and High Balance is going from $970,800.00 to $1,089,300.00.  

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If You’re Naive

Ah, naive you, person who wants to buy a house in Smallsville, Wherever USA- and spend less than $500,000 on your house.  Or you who are buying a 1bedroom in New York City.  You might think, “Oh Great!  This must mean that my mortgage rates will be lower, if the government is involved.  They have preferential rates for student loans, even borrowing during COVID.”

This is the conventional thinking.  And you can read articles that discuss a robust secondary market for these loans, like this one.

Unfortunately, you’re wrong.  The rates will be higher.  And more people will be caught in the net, since the loan limits have increased.  Banks want to lend to more qualified buyers.  This the classic case of banks lending to people who do not need loans.

I got some examples from a banker at Wells Fargo about how the rates can differ.  As of this writing:

Conforming Loan or Loans $647,200.00 and under:

• $800,000.00 Purchase Price
• 80% loan to value loan amount of $640.000.00.
• Interest rate on 30 year is 6.75% APR 6.784%.

Payment is $4,151.03

High Balance loan of $647,201.00 up to $970,800.00.

• Purchase price is  $810,000.00
• 80% loan to value or a loan amount of $648,000.00.
• Customer meets reserve requirements, Wells Fargo’s rate on a 30 year loan is 5.875% APR 5.921%.  The payment is $3,833.17.

That is a difference to payment due to the rate differential of .875% to interest rate is $317.86 a month in this scenario.

Once the loan size increases to $726,200.00, the loan size of  $647,201.00 will be subject to the higher conforming interest rate.

At a quick glance online, the rate differences for different buyers can be even more stark.

As of today, a borrower looking for only $300,000 will see a 7.46% interest rate.

A buyer looking to borrow $1,250,000?  6.18%  And this is lower rate is before borrowers get fancy with internal bank programs that can lower their rates further.

New rates create a high barrier to get over for first-time buyers.

Whom Does This Affect?

Funny you should ask.  I think you can see that qualified buyers who are getting large loans have options- and are getting much lower rates.  The people who are already having the hardest time affording property across the US and in NYC are first-time buyers.  They will see their mortgage rates go up.  In fact, they will be much higher than what are called “jumbo loans,” mortgages that are underwritten and held by banks and private lenders of all kinds (like in the $1.25mm example above).

Last quarter, there were 10,562 sales in New York City.  The median sales price was $755,000.  If those were the same numbers in the first quarter of next year, and every buyer took a mortgage, every single buyer would see a mortgage rate that’s at least 1% higher than a jumbo loan.  If we add in every mortgage up to $1.1mm, and take away the all cash deals, it will be a lot of people.  Perhaps 5000-6000 buyers in the first quarter alone.

The Quick Takeaway

We are not sure of the date when these changes take effect.  Better lock in your lower rates asap if you fall into these loan amounts. 

Other Advice

If you can’t do that, you should plan to take a bigger mortgage than you wanted, as long as you get the “jumbo loan” rates.  Then, put the additional money that you were going to put down to the side, and pay down the mortgage AFTER the closing.

If you can, spend more money on your purchase while the prices are lower AND so you get a jumbo loan…I know, presumptuous of me.

Wrapping Up

There is already an affordability crisis in the US for first-time buyers, and buyers who need to finance 75-80% of their purchases.  Rising rates have already hindered their buying.  Now, it will be even worse.  Whether there is price softening in markets or not, when rates are the highest for these buyers, their purchasing power is still deeply diminished.

How will effect the NYC market?  I would expect that studios and 1-bedrooms and even small 2bedrooms in New York City to feel the brunt of this change.  On the other hand, it will push borrowers to take on bigger debt to make sure their borrowing levels are above the conforming limit.

Call it what you will- unintended consequences, or bad timing, or just dumb policy.  But the competitive market for lending is disrupted by Fannie Mae and Freddie Mac for the worse.  And mortgage rates will be higher for those who can least afford it.  The American Dream got a little more nightmarish today.