Are the new home loan limits for Fannie and Freddie too high?

Let the good times roll.

Now you can buy a $1,021,895 home in California with as little as 5% down and still get a loan backed by Fannie Mae or Freddie Mac.

The Federal Housing Finance Agency announced Tuesday (Nov. 30) that the 2022 loan limit for high-cost metropolitan areas like LA/OC will increase to $970,800 from $822,375 in 2021. As a curator and regulator of Fannie and Freddie, the agency sets the limits for loans benefiting from more favorable interest rates.

Can you say boom and bust?

2022 conforming loan limits top out at $647,200 in the Inland Empire. Any conventional LA/OC mortgage at $647,200 or less is also priced as conforming.

Rates for conforming loans are on average about a quarter point lower than those for so-called high balance loans.

There is potentially no better, or more dangerous, tool in the homebuyer’s toolbox than the leverage of mortgage financing.

On the positive side, if you put down 5% ($50,000) on a $1 million property and the value of the property increased by 10% in one year to $1.1 million, you just earned 100 $000 while you sleep. This is a fair assumption, as house prices have appreciated at a rate greater than 15% in recent years.

Assuming you qualify and have an average FICO score of 740, your total monthly payment would be approximately $5,447 including taxes and insurance.

How much would it cost you to rent a million dollar house? Maybe $4,500? This is a compelling argument to buy, especially considering the added freedom of ownership and potential tax deductions.

But what if we are closer to the danger of a bust? House prices have been rising for nearly 10 years. Then that 95% leverage works against you.

If the value of that same $1 million property were to drop by 10%, you would have negative net worth, owning a $900,000 house with a $950,000 mortgage.

In 2000, Tom LaMalfa, president of TSL Research & Consulting Co., sounded the alarm to then-Fed Chairman Alan Greenspan and many others about an upcoming crash between Fannie and Freddie. .

“We’re in a similar situation to 2008. Nobody expects home prices to go down,” LaMalfa said. “There is no material change in underwriting with high loan-to-value ratios, high debt-to-equity ratios and minimal FICO scores.”

Jonathan Glowacki, principal actuary and consultant at global consultancy Milliman Inc., asked to what extent the imbalance between housing supply and demand is driving a 20% appreciation in homes?

“What happens when the market normalizes again? The risk lies in how house prices behave when supply and demand return to normalization,” he said.

Glowacki noted that automated computer-generated assessments, or AVMs, lack the intuitive thinking of a human assessor. Consider the poor performance of Zillow’s automated valuation models.

About 15% of the mortgage market before the 2008 housing crash was called Alt-A or subprime, LaMalfa observed. Today, unqualified mortgages or exotic mortgages represent about 3% of the market. His point is F&F had the lion’s share of the mortgage market before the crash of 2008, and it still does today.

Fannie and Freddie are still in government custody. If Fan and Fred collapse again, the taxpayer safety net is already there.

But F&F’s capital reserves are less than 1% on $6.1 trillion in mortgages, LaMalfa said. These are similar to levels prior to the 2008 mortgage crisis.

According to the US Census Bureau, there are nearly 104 million residential properties with 1 to 4 units in the country.

There are 55 million mortgages in the United States. Of those, 75 to 80 percent are guaranteed by the US government — either by F&F, the Federal Housing Administration, Veterans Affairs or the Department of Agriculture, according to Ed Pinto, senior researcher and director. from the Housing Center of the American Enterprise Institute. Keep in mind that the VA and FHA mortgage limits will mimic those of Fan and Fred after January 1.

When it comes to purchases, what is the high leverage that actually happens then and now? It’s eerily similar.

Average installments for Fannie and Freddie mortgages are lower this year than in 2007, the year the meltdown began, according to figures from CoreLogic. For example, M&F down payments for a home in the US have averaged 15% this year so far, compared to 17% just before the housing crash.

In Southern California, average down payments ranged from 17% to 24% this year in Los Angeles, Orange, Riverside and San Bernardino counties, up from 19% to 26% in 2007, according to CoreLogic figures.

On the other hand, US homeowners have significantly more equity (and less debt), according to Black Knight figures. The average owner had 55% equity in September, up from 36% in 2007.

In Los Angeles and Orange Counties, owners had an average of 65% equity in September compared to 46% in 2007; in the Inland Empire, the average net worth is around 56% compared to 29% before the crash.

According to Glowacki, any kind of distressed sale gets a 10-15% price reduction.

The big challenge is that highly leveraged borrowers or underwater borrowers will be locked out if they have to sell. When distressed sales occur, AVMs and human evaluators cannot ignore them. There will be a domino effect.

(Staff chart)

Freddie Mac rates the news: The 30-year fixed rate averaged 3.11%, up 1 basis point from last week. The 15-year fixed rate averaged 2.39%, 3 basis points lower than last week.

The Mortgage Bankers Association reported a 7.2% drop in mortgage application volume from the previous week.

At the end of the line : Assuming a borrower gets the average 30-year fixed rate on a conforming loan of $647,200, last year’s payment was $139 less than this week’s payment of $2,767.

What I see: Locally, well-qualified borrowers can obtain the following fixed rate mortgages without points: A 30-year FHA at 2.25%, a 15-year conventional at 2.375%, a 30-year conventional at 2.875%, a -balance ($647,201 to $970,800) at 2.625%, a 30-year conventional high balance at 3.125%, and a 30-year fixed jumbo at 2.875%.

Eye-Catching Loan of the Week: A 30-year mortgage with an adjustable interest rate for the first 10 years at 2.875% with no points.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or [email protected]. His website is