For the next 60-odd days, some homebuyers have an unusual opportunity to find financing at a tad lower cost.
The ceiling on mortgages that can be acquired by Fannie Mae and Freddie Mac changes annually at the first of the year. That's important because when the two government-sponsored enterprises (GSEs) put their stamps on loans, the cost to borrowers is generally a quarter-percent to a half-percent lower.
But some wholesale lenders, which fund mortgages written by brokers, are jumping the gun. Even though the new limit isn't normally announced until the week of Thanksgiving, two companies -- United Wholesale Mortgage and PennyMac Financial Services -- are already telling direct lenders they'll go higher on single-family houses.
The current limit is $548,250, but UWM and PennyMac will take loans as high as $625,000. And according to trade publication Inside Mortgage Finance, more wholesalers "are expected to follow suit."
That means homebuyers and refinancers who can't wait until 2022 can grab slightly lower rates right now. It's a tight financial window: If you need more than $548,000, but less than $625,000, a small gift is falling into your lap.
These lenders aren't breaking the rules; rather, they are funding these loans and holding them until Jan. 1 before selling them to the GSEs. They're rolling the dice that the Fannie-Freddie limit for 2022 will rise at least as high as $625,000. Given the way prices have jumped this year, that seems a pretty safe bet.
IMF "conservatively estimates" the new one-unit GSE loan limit will be at least $618,000, but could be as high as $656,000. Another trade pub, Mortgage News Daily, says the new ceiling will "almost certainly be higher than $625K," an amount it says "reflects an extremely safe, highly educated guess."
OK, let's catch our breaths and give this a fuller explanation.
Fannie Mae and Freddie Mac are giant financial institutions created by Congress to keep money flowing to the mortgage market. They do that by purchasing loans from the Main Street lenders that you and I borrow from and pooling them into securities for sale on the secondary mortgage market to investors worldwide. The money they take in is used to buy more loans, and the cycle goes on and on.
Since the two GSEs were minted by Congress, and have been under the stewardship of the Federal Housing Finance Agency since the Great Recession of 2008, it is widely believed -- but not necessarily true -- that Uncle Sam will come to investors' rescue should borrowers default in any huge numbers. In exchange for the perceived safety of Fannie and Freddie's bonds, investors are willing to take a little bit of a haircut on their expected returns. And that discount is returned to borrowers in the form of lower interest rates.
The loans that Fannie and Freddie can purchase are called conforming loans because they must adhere to the agencies rules, including the amount consumers can borrow. The amount is determined by a formula set down by Congress in the Housing and Economic Recovery Act to reflect changes in average home prices.
In 2020, the average increase as measured by the FHFA was 7.42%. Consequently, the "baseline" loan limit was raised by the same percentage: from $510,400 in 2020 to $548,250 this year for single-family homes, in most places. In some high-cost markets, though, the lid is $822,375.
But prices this year have been booming. According to the FHFA, the average price rose an astounding 19.2% between July 2020 and July 2021. The S&P CoreLogic Case-Shiller gauge reported an even larger 19.7% year-over-year gain in July. And in August, CoreLogic said annual price gains reached another all-time high of 18.1%.
There are some signs that price increases may be slowing. But the key to 2022's conforming loan limit will be prices for the entirety of the third quarter because the formula is based on quarterly, rather than monthly, shifts. Even if prices go flat in August and September, housing blogger Bill McBride believes there will be "a large increase in the conforming loan limit for 2022."
How large? That's anybody's guess right now. But let's use July's price jump as a benchmark and see what happens: If the current ceiling of $548,250 is adjusted upward by 19%, the 2022 limit would be around $652,500 in most markets and $978,750 in expensive ones.
For the base loan amount, the difference in the monthly payment for a 3% loan versus a 2.75% loan is a modest $87. Not a lot, but over a year, that adds up to $1,044. And over the full 30 years of the loan, the total savings is $31,320.
Of course, prices could have dipped some in August and September, causing the new cap to be less than those numbers. Or they could have risen even higher. Right now, it's pure conjecture.
Bottom line: If you are in the market, you can raise your price horizon and still secure a somewhat lower mortgage rate. And you can do it right now, without waiting until Jan. 1 for the new cap to kick in. The same goes for owners whose current loans exceed the current ceiling: You can refinance now to take advantage of the lower conforming loan rate.
Again, it's a tight window -- but not nearly as tight as it usually is.