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Why can million-dollar homes can get U.S. loan subsidies?

The “Looking Glass” ponders economic and real estate trends through two distinct lenses: the optimist’s “glass half-full” and the pessimist’s “glass half-empty.”

Buzz: Rampant housing inflation means the federal government will now back almost million-dollar mortgages — including deals in Los Angeles and Orange counties.

Backdrop: The Federal Housing Finance Agency says the maximum size of mortgages that can be bought by Fannie Mae and Freddie Mac in 2022 will rise by 18% — the largest percentage ever — to $970,800.

Those two government-backed agencies back so-called “conforming” mortgages, both loans for purchases and refinancings. Those subsidies usually lower the interest rate borrowers pay compared with what’s charged on larger “jumbo” loans.

Glass half-full

The increased allowances for the two agencies are the result of a mandatory annual review that involves a complex price-index formula.

This allows government-backed mortgage buying to keep pace with market pricing, especially by geography. The key factor is the Federal Housing Finance Agency’s home price index that jumped by 18% in the past year.

That means the nation’s most expensive markets are getting a higher  “conforming” loan limit for the coming year — up $114,425 from $822,375. Ten California counties (L.A., Orange, Alameda, Contra Costa, Marin, San Benito, San Francisco, San Mateo, Santa Clara, and Santa Cruz) plus the areas surrounding New York City and the District of Columbia and the entire states of Alaska and Hawaii qualify for the new limit.

What’s it worth? If this government support lowers a borrower’s rate by a quarter-percentage-point, my trusty spreadsheet says it’s roughly $130 saved monthly on a $970,800 mortgage.

At the other end of the price spectrum — the nation’s many so-called affordable communities — the conforming loan limit is now $647,200 vs. $548,250. (Spreadsheet says that’s a maximum savings of $90 monthly.)

In the middle are certain markets with limits somewhere in between, based on local pricing. For example, here are the new maximum conforming loan sizes for other Southern California counties: San Diego ($879,750), Ventura ($851,000), Santa Barbara ($783,150) and Riverside and San Bernardino ($647,200).

Glass half-empty

Some surprising markets also get the top $970,800 loan limit, and that says a great deal about the nation’s housing affordability issues.

Why are Pennsylvania’s Pike County and West Virginia’s Jefferson County on the list? Those two states are frequently on “cheapest places to live” lists. Well, these counties have become remote suburbs for the pricey New York and D.C. metro areas, respectively

Other beneficiaries of the government’s mortgage largesse are counties known for high-end resort living such as Massachusetts’ Nantucket and Dukes (Martha’s Vineyard); Utah’s Wasatch and Summit (Park City); Wyoming’s Teton (Jackson Hole); and Idaho’s Teton.

Note that mortgages made for vacation homes and second residences can be bought by Fannie Mae and Freddie Mac, so these higher loan maximums apply.

It’s also worth noting that restrictions on agency purchases of mortgages for properties that aren’t the borrower’s primary residence were recently eliminated.

What’s ahead

Higher limits may help some borrowers buy today’s pricier homes. To be fair, I wish more federal economic aid of all sorts was varied due to differences and fluctuations in regional costs of living. 

Imagine if the amount of a pandemic era stimulus check was adjusted by the cost of living in the region where a taxpayer lived.

And the real estate transaction industry, from mortgage makers to real estate agents, will cheer this slice of government intervention because it’s good for their bottom lines. These same people often fight other government’s attempts to make housing more affordable — like rent control.

So let’s be honest. The housing industry is addicted to various ways the government subsidizes the mortgage business.

Without these government mortgage giants, homebuying would be a very different endeavor. And you could argue, federal “help” — making financing cheaper — actually boosts prices and hurts the chances of many homeowner wannabes.

Postscript

Will anybody ever want to discuss how misguided government support for housing can be?

Ponder this example: In an era of a purported housing shortage, why provide any financial support for second-home purchases, no less upping the size of the subsidized mortgages?

Jonathan Lansner is the business columnist for the Southern California News Group. He can be reached at jlansner@scng.com


Source: Orange County Register

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