The charter acts for Fannie Mae and Freddie Mac establish a procedure whereby the Federal Housing Finance Agency sets maximum amounts for the unpaid principal balance of mortgages purchased by the government sponsored enterprises. These amounts are the (conventional) conforming loan limits.
FHFA has set these limits annually since its establishment in 2008. For 1-unit properties in most areas, the baseline CLL is $647,200 for 2022. Higher limits have been established for 2-unit ($828,700), 3-unit ($1,061,650), and 4-unit ($1,244,850) properties.
The CLLs are established for entire metropolitan areas, micropolitan areas, or non-metro counties. They are higher for areas with average home values above certain levels. A jurisdiction is classified as a "high-cost area" if 115 percent of local median home value exceeds the baseline limit. The baseline limit for 2022 is $647,200, thus an area is considered high-cost if the median home value exceeds $563,000 (i.e., $647,200/1.15). However, the conforming loan limit is capped at 150 percent of the baseline limit, or $970,800 for 2022. By statute, the CLLs for Alaska and Hawaii are set at the maximum level, regardless of local house values.
The CLLs are adjusted annually based on the change in a FHFA home price measure over a 12-month period. Specifically, to determine the CLL for a given year, the CLL for the previous year is multiplied by the ratio of the average home price for the third quarter of the preceding year to the average price for the third quarter of the second preceding year. For example, the limit for 2023 will be calculated by dividing average home price for July-September 2022 by the average price for July-September 2021. If this ratio equals or exceeds one, it would be multiplied by the limit for 2022 to obtain the limit for 2023.
If home prices decline over a reference period, the CLL would not be reduced, but the decline would be netted out in calculating the increase in the limit for a subsequent year or years in which home prices rise.
FHFA calculates several home price measures, as discussed in detail on their website. One is a monthly index. Another, used for adjusting the baseline CLL, is the quarterly "expanded index" using data from the GSEs, FHA, and County Recorders' offices. This index for the third quarter will be released in late November and that will determine the CLL for 2023.
The monthly price index has been released through August, the second month of the third quarter. The average monthly index over the July-September period tracks the expanded index closely. So the change in the average monthly index provides an estimate of the likely change in the expanded data index over the reference period, and thus it provides an estimate of the likely change in the CLL in the subsequent year.
FHFA's monthly price index fell an annual rate of 2.5 percent in July and 2.6 percent in August, but the average index for July-August 2022 was still 12.3 percent above the index for July-September 2021. If the monthly index fell by an additional 2.5 percent in September, the average for July-September 2022 would be 11.3 percent above the figure for July-September 2021, and the baseline CLL for 2023 would be approximately $720,000, or in the range of $715,000 to $725,000. The limit for high-cost areas for 2023, 50 percent above the baseline limit, would be approximately $1.08 million, the first time the CLL for a one-unit property would exceed $1 million.
The metropolitan areas where the CLL is most likely to rise to this level are those where the limit was at the maximum for 2022—namely, Los Angeles, San Francisco, New York, and Washington, DC.
