How Much will the Fannie & Freddie Conforming Loan Limit Increase for 2022?

With house prices up sharply over the last year, an interesting question is: How much will the Fannie & Freddie conforming loan limits (CLL) increase for 2022? And how much will the FHA insured loan limits increase?

These increases could have a significant impact on homebuilders.

First, there are different loan limits for various geographical areas. There are also different loan limits depending on the number of units (from 1 to 4 units). For example, currently the CLL is $548,250 for one unit properties in low cost areas. For Los Angeles county, the CLL is $822,375 for one unit (50% higher than the baseline CLL).

The CLL for each county is available at 2021 Conforming Loan Limits.

The limit is updated annually, and is adjusted using the FHFA’s quarterly national, seasonally adjusted, expanded-data index: Expanded-Data Indexes (Estimated using Enterprise, FHA, and Real Property County Recorder Data Licensed from DataQuick for sales below the annual loan limit ceiling). The adjustment is based on the House Price Index value in Q3 divided by Q3 in the prior year. The FHFA index is a repeat sales index, similar to Case-Shiller.

Note: This calculation has changed with the Housing and Economic Recovery Act of 2008 (HERA). Also, in 2015, the FHFA decided to use the seasonally adjusted expanded data index.

Currently we only have data for Q1 2021 for the quarterly index (up 12.2% from Q1 2020), although the Purchase-Only index was up 18.0% through May 2021 - and the Expanded Quarterly index will probably be up close to 18% in Q2.

Note that if house prices decline, the CLL is not reduced. The CLL was at $417,000 from 2006 through 2016, and only increased slightly in 2017 as the house price index caught back up to the previous high during the housing bubble. This graph shows the CLL since 1979. The CLL was unchanged from 2006 though 2016.

We need the house price data through September 2021 to calculate the conforming loan limit for 2022. This quarterly data will be released in late November. Based on the current year-over-year house price change, it appears the CLL could be close to $650,000 in 2022. For high cost areas like Los Angeles, the limit could increase to around $1 million.

What about FHA insured loans? From the FHA:

The National Housing Act, as amended by HERA, requires FHA to establish its floor and ceiling loan limits based on the loan limit set by FHFA for conventional mortgages owned or guaranteed by Fannie Mae and Freddie Mac. Today, FHA's minimum national loan limit, or floor, is set at 65 percent of the national conforming loan limit of $548,250.

So the current FHA insured limit (low cost area) is 65% of $548,250 or $356,362. In high cost areas, the FHA insured limit could be as high as $822,375. The limit varies by geographical area (based on average house prices).

Note that HERA changed this relationship. For low costs areas, prior to HERA, the FHA insured limit (low cost) was 48% of the CLL.

Once again we need the expanded index house price data for Q3, but based on the current year-over-year price change (through May), the FHA insured limit could increase to around $420,000 for low cost areas (and much higher for high cost areas).

Even if price growth slows over the next few months, there will be a significant increase in the CLL for 2022.