The Fannie Mae and Freddie Mac Charter Act establishes the procedure by which the Federal Housing Finance Agency sets limits on the unpaid principal balance of mortgages purchased by government-sponsored companies. These amounts are the (traditional) conforming loan limits.
The FHFA has set these limits annually since its inception in 2008. For 1-unit properties in most areas, the 2022 baseline CLL is $647,200. 2 unit ($828,700), 3 unit ($1,061,650) and 4 unit ($1,244,850) properties.
A CLL is established for an entire metropolitan area, a minor metropolitan area, or a county outside a metropolitan area. In areas where the average housing price exceeds a certain level, it is higher. A jurisdiction is classified as a “High Cost Area” if 115% of the median home price in the area is above the baseline limit. The baseline limit for 2022 is $647,200, so an area is considered high cost if the median home price is above $563,000 (i.e. $647,200/1.15). However, the conforming loan cap is capped at 150% of the baseline cap, or $970,800 in 2022. By law, CLLs in Alaska and Hawaii are set at maximum levels regardless of local housing prices.
The CLL is adjusted annually based on changes in FHFA home price measurements over a 12-month period. Specifically, to determine the CLL for a particular year, multiply the previous year’s CLL by the ratio of the 3rd quarter average house price of the previous year to the 3rd quarter average price of the previous year. For example, the 2023 limit is calculated by dividing the July-September 2022 average home price by the July-September 2021 average price. If this ratio is greater than or equal to 1, multiply it by the 2022 limit to get the 2023 limit.
If house prices fall over the base period, the CLL will not be lowered, but the decline will be offset when calculating the limit increase for the next year or years of house price increases.
The FHFA calculates several home price measures as detailed on their website. One is the monthly index. Another method used to adjust the baseline CLL is the quarterly “extended index” using GSE, FHA, and County Records Office data. This third quarter index will be released in late November and will determine his CLL for 2023.
The monthly price index through August, the second month of the third quarter, has been released. The average monthly index from July to September tracks the extended index closely. The change in the average monthly index therefore provides an estimate of the likely change in the extended data index over the reference period, and thus an estimate of the likely change in CLL in the following year.
The FHFA monthly price index fell by an annualized rate of 2.5% in July and 2.6% in August, but the average July-August 2022 index is still below the July-September 2021 index at 12.3. % was higher. The July-September 2022 average would be 11.3% higher than the July-September 2021 figure, with a 2023 baseline CLL of approximately $720,000, or a range of $715,000 to $725,000. The high cost area cap in 2023 will be about $1.08 million, 50% above the baseline cap, making his CLL for a one-unit property exceed his $1 million for the first time.
The metropolitan areas most likely to see CLL rise to this level are those with the highest caps in 2022: Los Angeles, San Francisco, New York, and Washington DC.