The federal government is about to back mortgages of nearly $1 million for the first time.
The maximum size of home-mortgage loans eligible for backing by Fannie Mae and Freddie Mac are expected to jump sharply in 2022, a reflection of the rapid appreciation in home prices nationally over the past year.
The increase may make it easier and cheaper for some borrowers to buy a home, particularly in more expensive areas of the country, but the higher limits are also likely to elevate debate about how big of a mortgage is too big to be backed by the government.
It’s easy enough to understand why the increase has happened. As the WSJ explains, the limits are “updated annually using a formula that factors in average housing-price increases nationwide.” In certain parts of the country where housing is expensive, that updating will take the limit up to close to $1 million. We will know the exact numbers at the end of the month.
At the same time, we are living at a time of substantial house-price inflation (existing-home prices rose by 16 percent in the third quarter compared with last year, the fastest rate in more than half a century). At least arguably, this increase will add more fuel to a fire burning merrily away, for the most part because of underbuilding and, somewhat ironically under the circumstances, ultra-low interest rates (mortgages that fall below the limit will, thanks to Fannie and Freddie’s backing, typically be cheaper). However, the magic word here is “arguably.” With borrowing costs so low, it is questionable how much difference the Fannie and Freddie backing would make to prices, certainly at the higher end.
