Will Rising Limits on Compliant Mortgages Cause Another Housing Crisis?

Borrowing limits are expected to increase. Will this push buyers to gain the upper hand?

Home prices have been on the rise since the start of the year and they don’t appear to be slowing down. One of the main reasons is that low mortgage rates have fueled increased demand from buyers. Meanwhile, limited inventory is forcing buyers to fight bidding wars, driving property values ​​up.

Unsurprisingly, home buyers are increasingly having to take out larger mortgages to finance properties given today’s prices. And so in 2022, compliant loan limits will increase to accommodate these circumstances.

Compliant loans are those guaranteed by Fannie Mae and Freddie Mac, the two government-sponsored entities that purchase mortgages. It’s possible to get a non-conforming loan, but usually that means ending up with a less affordable mortgage.

Each year, a limit is set for compliant loans. Right now, that limit is $ 548,250 in most of the country and $ 822,375 in high-cost areas. In 2022, these limits will increase to $ 647,200 and $ 970,800, respectively. But whether that’s a good thing remains to be seen.

Will increasing loan limits cause borrowers to do too much?

You may remember the 2008 housing crisis that drove many homeowners into foreclosure and plunged the real estate market. A big reason the disaster happened is that too many borrowers took out mortgages they couldn’t afford, fell behind, and lost their homes in the process.

Since then, mortgage lenders have become more strict about verifying mortgage applicants. And they’ve become more conservative in the amount of money they’ll lend. But with consistent loan limits on the rise, the fear is that borrowers, in the coming year, will become increasingly overwhelmed.

Fortunately, we are unlikely to experience a housing crisis like we did over a decade ago when the housing bubble burst. Mortgage lenders have learned a lesson from these events and will likely continue to maintain more stringent requirements for borrowers at all levels.

Also, one of the main reasons so many borrowers got into trouble in 2008 is because they fell underwater on their mortgages – a scenario that occurs when a home’s market value is lower. to his remaining mortgage balance. When this happens, selling a home to get out of a hard-to-pay mortgage is not an option. And so many homeowners have been forced into foreclosure because they can’t meet their mortgage obligations.

These days, home values ​​are on the rise. Even if borrowers take out higher mortgages in the new year, they are less likely to find themselves underwater, at least not in the short term. Certainly, if home values ​​plunge quickly past their current peak, those circumstances could change and more homeowners could indeed find themselves underwater in the years to come. But for the most part, that shouldn’t happen at about the same rate as in 2008, as lenders today typically demand higher down payments than years ago.

Borrowers should be careful

Of course, borrowers still need to proceed with caution in the coming year, given the higher loan limits. But those who put down a 20% down payment will start off with a decent amount of home equity which could, in turn, make them less likely to find themselves underwater. That, combined with tighter lending practices, may be enough to avert a crisis even if home values ​​decline.

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