A $5,000 Increase? What About $10,000?
A new analysis from Black Knight Financial Services reveals that a slightly higher conforming loan limit could be enough to give mortgage origination volume a serious boost.
They provided one scenario where the conforming limit would be increased $10,000 to $427,000. If that were to happen, they argue another 40,000 mortgages would be funded with an aggregate balance of some $20 billion.
Put another way, it’s a 1% increase in total origination volume.
While that sounds like great news, it might not happen. I mentioned on Twitter a while back that the 2017 conforming loan limit was only expected to rise $5,000 to $422,000, though that too is just speculation.
It’s unclear how much that would boost originations, though it should certainly help. Additionally, those close to the cutoff thanks to rising home prices will be able to squeak under the limit and avoid taking out a jumbo loan.
Black Knight noted that there were about 17 times as many originations (~100,000 more) right at the conforming limit compared to preceding dollar amount buckets over the past 12 months.
Then originations drop by around 70% once the limit is passed, which makes sense because jumbos are perceived as harder to come by and more expensive.
The funny thing is jumbo loans are actually pretty attractively priced, so it’s not necessarily a bad thing to take out a mortgage above the conforming limit.
The conforming loan limit is also somewhat less important thanks to the high cost loan limit, which goes up to $625,000 in the contiguous United States.
Conforming Limit Hasn’t Increased in a Decade
While the anticipated $5,000 increase in the 2017 conforming loan limit doesn’t seem like big news, it’ll mark the first time it has increased since 2006.
The conforming loan limit steadily increased from 1980, then just $93,750 for a single-unit property, to $417,000 in 2006, before stalling as the mortgage crisis ravaged the housing market.
The last increase was from $359,650 in 2005 to $417,000 in 2006, a near 16% jump, and perhaps an ominous sign of what was yet to come.
At that time, home prices were rising way too fast and a bubble quickly ensued, thanks to shoddy financing that did all it could to keep up with skyrocketing property values.
But it’s clear an increase in the loan limit is now necessary, thanks to years of gains since prices bottomed about four years ago.
The FHFA, which oversees Fannie Mae and Freddie Mac, actually sets the limit, and per their home price data, the prior national peak was in March 2007 at 226.71 (it started at 100 in 1991).
Nationwide home prices then bottomed at 179.45 in May 2011 before climbing back to new highs late last year.
The most recent release (August 2016) has the national index at nearly 237.88, meaning the FHFA will likely have to act.
While the $5,000 is just one guess, we should have a firm answer in a couple weeks when the FHFA releases its annual guidance.
Keeping the loan amount at or below this limit also expands options as more lenders offer conforming loans as opposed to jumbo. And guidelines are often a bit easier to meet.
Additionally, the fact that national home prices are just now back above pre-crisis levels means there could be a lot more room to run before things settle down.
This is more good news as 2017 is already expected to be a trillion-dollar year for home purchase mortgages, the best showing since things went south.