Recently, the Federal Housing Finance Agency (FHFA) announced its new conforming loan limits for 2022. This increase will make it easier for a larger group of borrowers to get a government-backed loan to purchase a property. The change will affect homeowners, real estate investors, and stock market investors.
Here's a look at how it will impact all three groups.
Home price appreciation has been on a tear this year
Home prices have been on a tear for the past year, rising over 18.5% year over year as of the third quarter, according to the FHFA House Price Index. The FHFA House Price Index is basically similar to the Dow Jones Industrial Average Index, except it looks at all the houses that sold in a particular time period and compares the sale price to the previous sale price. From there, it calculates the index value.
The FHFA House Price Index is used to determine the conforming loan limits for loans guaranteed directly by the government via the FHFA, the Veterans Administration, and the U.S. Department of Agriculture. These limits also apply to loans backed by the government-sponsored entities Fannie Mae (FNMA 0.98%) and Freddie Mac (FMCC 0.10%). Because these loans are backed by the government, they carry lower interest rates, since government-backed securities have no credit risk.
Starting Jan. 1, the government has said it will now guarantee mortgages up to $647,200 in most areas. High-cost urban areas qualify for up to $970,800 in mortgage guarantees. The limits increase for properties up to four units, which is a bonus for professional real estate investors. They can get loans up to $1.867 million in high-cost areas.
Higher limits help some mortgage originators more than others
The increases in loan limits help the big originators like Rocket Companies (RKT 3.07%) and UWM Corp. (UWMC 0.41%). These lenders tend to concentrate on government-guaranteed loans. If the conforming loan limits were not raised, it would limit the number of loans that fit into their business model.
Lenders that focus on originating loans that are not guaranteed by the government, especially mortgage REITs like Redwood Trust (RWT 3.22%) or Annaly Capital Management (NLY 1.59%), might see a smaller number of potential loans head their way. That said, rising home prices should keep delinquency rates low.
Higher limits should support further home price appreciation
The increase in lending limits should support further home price growth, which will help single-family rental companies like American Homes 4 Rent (AMH 1.85%). Rising home prices make the company a lot cheaper than it initially appears. Apartment REITs, especially in high-cost urban areas like Equity Residential (EQR 2.51%), should see rental growth.
But the biggest beneficiaries of the new limits will ultimately be homebuyers, especially those who have sat out the big increase in home prices. More of them will now be able to qualify for low-down-payment FHA loans and Fannie Mae and Freddie Mac loans.