The Federal Housing Finance Agency (FHFA) announced on Tuesday that it would be increasing the conforming loan limits on mortgages to be acquired by Fannie Mae and the Freddie Mac for the seventh consecutive year. This announcement has traditionally been a “sneak peek” at the upcoming lending limits for the Home Equity Conversion Mortgage (HECM) program.
For most of the United States, the maximum conforming loan limit for one-unit properties will be $726,200 in 2023, up from $647,200 in 2022. For areas with higher-than-average home values, defined as places where median home values exceed 115% of the baseline, the FHFA has set a limit of $1,089,300 for 2023, up from $970,800 in 2022.
“Median home values generally increased in high-cost areas in 2022, which increased their conforming loan limits (CLL). The new ceiling loan limit for one-unit properties will be $1,089,300, which is 150 percent of $726,200,” FHFA said in its announcement.
Accelerated home price appreciation (HPA) is cited as the driving factor in the 2023 limits. According to the FHFA’s third quarter 2022 Housing Price Index (HPI) report, published on Tuesday, home prices increased by an average of 12.4% between the third quarters of 2021 and 2022 — several percentage points lower than the growth rate observed during the same period last year.
What this could mean for reverse mortgages
The FHFA does not have authority over the lending limits tied to reverse mortgages. However, the Federal Housing Administration (FHA) has typically aligned with the new Fannie and Freddie limits. The loan limit handed down by the Department of Housing and Urban Development (HUD) for federally-backed reverse mortgages in 2022 was $970,800, which matched the FHFA’s high-cost limit.
The Housing and Economic Recovery Act (HERA) of 2008 dictates that the baseline conforming loan limit must be adjusted annually for Fannie and Freddie in order to reflect changes in the average U.S. home price.
If the HECM lending limit exceeds $1 million nationally, it is possible that the lending limits could further arrest the potential for borrowers of higher-value homes to be served by proprietary reverse mortgages, which are typically designed to provide a reverse mortgage option for homeowners with appraised values of up to $4 million. Proprietary products have their own sets of challenges, however, as fluctuations in the capital markets have caused several providers to impose changes and even outright suspensions on their availability to compensate for macroeconomic volatility.
As noted in the FHA’s Annual Report to Congress, released earlier this month, the reverse mortgage portion of the Mutual Mortgage Insurance (MMI) Fund reached positive territory for the second time since 2015, with much of the improvement in the HECM portfolio’s capital ratio attributed to strong HPA over the past two years, according to the FHA.
“The financial performance of the HECM portfolio has improved in each of the last four years and is now positive for the second time since FY 2015,” the report states. “The HECM portfolio is historically more volatile than the forward mortgage portfolio, as projections of the HECM portfolio’s financial performance are highly sensitive to changes in HPA.”
FHA later advised RMD that recent observable changes in HPA could lead to a different outcome for the HECM book of business in coming years.
“The current capital ratio for the HECM program is due largely to the unprecedented increases in home values seen in recent years,” a HUD spokesperson told RMD earlier this month. “As home prices moderate in the coming years, so too will the capital ratio for the HECM program.”
Reverse mortgages headed into 2023
The recent volatility in the American economy has not spared the reverse mortgage industry. Volume has dropped considerably compared to 2021, and rampant inflation and interest rates changes imposed by the Federal Reserve have considerably increased the cost of borrowing.
In addition to layoffs at major reverse mortgage lenders, one leading, top 10 reverse mortgage lender halted its originations in 2022. This will impact distribution for both the HECM product and will take one major proprietary reverse mortgage product off the board.
Still, if the HECM lending limit surpasses $1 million in 2023, the reverse mortgage industry may have greater latitude to pivot toward serving borrowers with higher home values. This strategy has been championed by retirement specialists as a path toward increasing the reverse mortgage product’s reach.
That’s not to say that a lending limit north of $1 million would remove criticism. When the FHA released lending limits for 2021 under the Trump administration, then-FHA Commissioner Dana Wade openly questioned whether or not the FHA was achieving its mission with lending limits of that size.
“FHA has seen consistent increases in loan limits during the past few years, putting it in a position to serve a segment of borrowers that may be better served by the conventional [non-agency] market,” Wade said. “FHA’s mission is to support low-to-moderate income borrowers, so why does the law permit FHA to insure mortgages up to $822,375? This is a question for Congress and the taxpayers who stand behind FHA to answer.”