Fannie Mae and Freddie Mac recently announced they will raise the maximum limit on their home loans to over $1 million in certain markets where home buyers are struggling to get financing.
The decision reflects the new reality facing home buyers in America's most challenging real estate markets, where even an "average" home can cost well over $1 million. The high prices threaten to leave generations permanently frozen out of the housing market.
Fannie Mae and Freddie Mac have traditionally operated with what are known as conforming loan limits (CLLs), which act as limits on how much money most buyers can borrow. The limits have risen through time, and the limit for most of the country is now $726,000. But some regions with especially high average home prices had a cap of $1.09 million to give buyers a more realistic chance of securing financing.
New Loan Limits Reflect A Scary Reality
It didn't come as much of a surprise that Fannie and Freddie lifted that cap to $765,000 for 2024. They also lifted the $1.09 million cap to a maximum of $1.15 million and expanded the list of counties where borrowers would be eligible for a million-dollar-plus loan. Some of the areas where the million-dollar-plus CLL limit exists include:
- San Diego County
- Los Angeles County
- Metro Washington, D.C.
- New York metropolitan area
- Summit County, Colorado (home of Breckenridge Ski Resort)
- San Francisco
- Hawaii
The rapid rise of real estate prices in America's top markets has caused many of them to overheat to a point where the average house costs nearly $1 million or more. That reality is pushing all but the most well-heeled buyers out of the housing market entirely, which is why Fannie Mae and Freddie Mac raised the CLLs.
What Are The Numbers On A $1 Million Loan?
The original intent of Fannie Mae and Freddie Mac loans was to help everyday Americans buy property by insuring their mortgage through the government. It allowed buyers with credit scores above 580 to put as little as 3.5% down on a property and finance the rest. Buyers with credit scores over 500 but below 580 were required to put 10% down.
It's hard not to imagine an"everyday American struggling to make payments on a $900,000 loan at today's interest rates. First, no one with a 580 credit score is going to qualify for the lowest mortgage rate, which is around 7%. Second, even if they did qualify for that loan, a 7% annual percentage rate (APR) on a $900,000 loan is $63,000 per year in interest. That would be $5,000 per month in interest payments alone.
Add loan principle, impounds for property tax and insurance, and the monthly mortgage payment is a lot closer to $8,500. The standard qualification ratio of three times the mortgage in income means that a buyer would need to make $27,000 per month to qualify for the loan.
The Housing Affordability Crisis Laid Bare
As recently as 15 or 20 years ago, anyone making over $300,000 per year would be considered as having made it. Today, they would be considered strong applicants for a Federal Housing Administration (FHA) loan to buy a home. That is a frightening reality because less than 2% of the American population makes that kind of money. Never mind the fact that the original purpose of FHA loans was to help the American middle class become homeowners.
It's not a pretty picture, and it illustrates why big cities like New York, San Francisco and Los Angeles are seeing people relocate to seek housing opportunities in the Sun Belt and Midwest. The bottom line is that it's unsustainable for $300,000 to be the minimum salary to be middle class in any real estate market, and the latest effort by Freddie Mac and Fannie Mae amounts to little more than trying to dress a gaping wound with a Band-Aid.