Unpacking the 2025 FHFA Loan Limits | Dec. 2, 2024

Jim Glennon: 00:00:03

Welcome to Optimal Insights, your weekly source.

Jeff McCarty: 00:00:05

For real time rate data and expert capital markets commentary brought to you by Optimal Blue. Let's dive in and help you maximize.

Alex Hebner: 00:00:12

Your profitability this week.

Jim Glennon: 00:00:14

Welcome to Optimal Insights, your weekly source for timely market analysis and expert commentary from Optimal Blue. I'm your host, Jim Glennon, vice president of hedging and Trading Client Services at Optimal Blue.

Our clients and industry partners have long relied on Optimal Blue for trusted insights and commentary, and these podcasts are an evolution of our commitment to keep the industry informed. Let's dive into today's episode. Hi, welcome. I hope everybody had a had a wonderful Thanksgiving last week. Welcome to December.

Welcome to our co hosts, Jeff McCarty, VP of Hedging and Trading product, as well as Alex Hebner, hedge account manager on our desk and also our market specialist on the podcast. Welcome, gentlemen.

Jeff McCarty: 00:00:55

Happy Thanksgiving.

Jim Glennon: 00:00:56

Happy Thanksgiving. So today we'll be talking, as always, some timely market topics, including the unemployment report coming up this week.

We'll also get a little bit more into some cabinet appointments, some other current events, and even foreshadow some tariff discussion that we're going to carry into next week on the cast.

And as always, if you're an originator or a capital markets person or anyone who's really interested in what's going on in our industry and with interest rates and with the markets, definitely we want to you keep you informed on what you need to be paying attention to. So we'll get into a lot of that today. And then we're going to in the segment, third segment, we're going to talk about loan limits.

So you may have noticed that the new loan limits for next year came out last week.

So we'll talk a little bit about the, you know, the history of, you know, where these loan limit calculations came from, how they're rolled out timing wise on an annual basis.

We'll talk about what happened last week with the new limits coming out and even get into some arguments for and against these loan limits that continue to rise and what some of the effects of that might be.

But before we get into that, as you know, we have our summit coming up, which is our annual conference, which is going to happen February 3rd through the 5th at the Marriott Marquee in San Diego. Again, we've got some deals going on for registration right now, so please do check that out.

We're having a Cyber Week deal running this week where you can get a discounted rate at and you just have to use a code when you register. And that code is cyber25, all one word, cyber25. So please do check that out.

As you know, we're going to have some great sessions where we dig into things like, you know, everyday operations of the business and secondary marketing and capital markets. But we're also going to get into some, you know, overall strategy, you know, with profitability and get into subjects like AI.

And we're gonna have some great speakers, you know, some internal speakers, but also some folks from the outside. We will have the great Tony Hawk who's going to visit with us and speak Wednesday morning.

Jeff McCarty: 00:02:59

Yes, eight more weeks that I get to be excited about getting to hear Tony Hawk. So we get to talk about it every week for the next eight or nine weeks here.

Jim Glennon: 00:03:08

That's right. Also Mike Fratentoni from the mba, chief economist at the NBA. So really interested in the wisdom that he has to drop on us in February.

So more announcements to come, but please check out the website and register. And with that, let's go check in with Alex.

Jeff McCarty: 00:03:26

All right. Welcome back, Alex.

Alex Hebner: 00:03:28

Hey, Jeff, how's it going?

Jeff McCarty: 00:03:30

Good, good.

So even with the holiday week, last week still felt like it was a relatively busy week between Fed minutes being released, some various economic numbers and then, you know, Trump making some appointment announcements to start his administration. So maybe walk us through some of the economic numbers that came out last week.

Alex Hebner: 00:03:50

Yeah, definitely. Yeah, the week was pretty front loaded.

Just anything that would have been released later in the week to account for the holiday they released on Tuesday. So you saw a large number of data points coming out on Tuesday.

Some of the big ones that I kind of wanted to draw attention to were consumer confidence, which came in right at Expectations111 release. So still showing that the American consumer is spending money and pretty confident in the economy.

I think that's a little conflicting with a narrative that's kind of emerging about a weakening in the consumer and specifically around holiday expectations and consumer spending. Going into the holidays, there was expectations of weak Black Friday spending. And a lot of deals you might have noticed, started early this year.

And when the deals are starting early, that means that companies are trying to get ahead of each other on securing your dollars. So that kind of just means that companies are expecting weaker sales. Some preliminary numbers, we're recording this the Monday after Black Friday.

But some preliminary numbers that came out of like MasterCard and other credit services showed that spending was up 3 and a half percent year over year since last Black Friday. But given inflation, inflate away those dollars by 2 or 3% and we're really only seeing maybe a 1% increase in raw spending on Black Friday.

west release we've seen since: 2022

So that number did kind of come with, with some asterisks attached to it, caveating it with the fact that their home building in the south was still being impacted from those, those hurricanes that we saw in October.

Jeff McCarty: 00:05:32

The consumer spending, I mean, that's a great one to keep an eye on. Jim. I feel like you always watch that one along with just kind of credit card debt and just, you know, what, what is the consumer doing it.

It is one of those leading or one of the first indicators we have. Right. But it's still, I mean, it's, it's not growing, but it's not, it's not weakening substantially, but it's.

I feel like we're waiting for the other shoe to drop there.

Jim Glennon: 00:05:52

Yeah, I mean, it's, it's Main Street. Right. It's what drives the US economy. I believe 60% ish of GDP is consumer spending. Right.

And if we're in a mode now where we're hitting any kind of limit on that, whether it's because wages are not climbing anymore or folks have borrowed more money than ever, which we have on credit cards, or if the job market is slowing down or if it's inflation or whatever. Right. We could be getting into another cycle where that number starts to peak out and then we have to have some sort of correction.

Alex Hebner: 00:06:24

Absolutely. Yeah. Like you said, 60% of the US economy is consumer spending.

And it's always good to keep an eye on, yeah, credit card debt and then any delinquencies we see in auto debt and home, homeownership, mortgage debt, those are, those are definitely some leading indicators that folks are under, under pressure.

Jeff McCarty: 00:06:40

So, you know, maybe part of the reason we're seeing, you know, consumer spending not, not fall off a, you know, not, not fall off considerably. At least, you know, economy has been relatively, markets have been relatively stable post election.

I think going in the election, probably all of us were expecting more volatility than we've seen one way or another. And I think that's a result of, you know, one just, you know, the manner in which Trump won.

Right there, there hasn't been any sort of uncertainty surrounding who won.

It's very clear that Trump did win and then some of his appointments, particularly on the economic side, I think are giving some confidence to the, to the market at this point?

Alex Hebner: 00:07:25

Absolutely. Yeah. I think, yeah.

Like you said, the way that Trump won the election, winning both the popular vote and the, and the electoral College was, was just such an astounding, you know, defeat of the Harris campaign that there was really no, no questioning the results election. I know, you know, for this podcast we were talking like, hey, should we, should we record on that Friday? Are we going to know who won yet?

And you know, we could have recorded that on Wednesday. That podcast on Wednesday we, we knew by then and yeah, bringing Trump in again for a second term was positive for markets.

I don't, I don't think, I think there would have been a similar result in the Harris campaign. I don't think any, either of those campaigns are really, were really running on an anti business platform of any sort.

But yeah, then in the, in the preceding weeks we've seen, you know, Trump begin to suss out his cabinet that all that'll come in with him. Two of the big ones that came out in the past few weeks was getting Besant in for the Treasury. You know, he has a, he has a Wall street background.

He cut his teeth with George Soros and currency trading in London. So, so he's very pro business.

And then Howard Lutnick, who has history with Cantor Fitzgerald, was their CEO for a number of years in a Commerce Secretary.

And so I think the combination of those two has given the markets pretty great confidence that this will be a pro business environment at least for, you know, the first half of the administration.

Jim Glennon: 00:08:39

Yeah, we're seeing new highs in the market every day. Right.

So obviously folks, you know, there may have been some defensive plays before the election just kind of hedging against what the fallout could have been from the election now putting money back into the market. But also just seeing this new administration probably being, you know, leaning towards being pretty business friendly.

So you know, it seems like that just equities are going to continue being healthy from here.

Alex Hebner: 00:09:05

Yeah, Besant, I think, you know, you know, he comes from a typical kind of Republican background of deregulation and deficit, keeping an eye on the deficit spending. So you know, those are two things that, you know, always cause Wall street to rally.

Jeff McCarty: 00:09:18

The one spot where there has been, you know, a lot more regulation adjacent rhetoric is tariffs. Of course. Right. We'll get into that a lot more next week in detail and talk about how tariffs could, could impact various parts of the economy.

But so far, again, you know, bessence rhetoric is that he's, you know, he sees using tariffs, they'll use tariffs strategically, which certainly walks back some of the more brash comments from from Trump on, on tariffs. Right.

Alex Hebner: 00:09:46

Definitely on the campaign trail we saw Trump throwing out numbers like a flat 60% tariff on anything imported from China and 20% from anywhere else in the world. We've definitely seen that.

That walked back one Besant, you know, in his comments on tariffs, he said to, to, you know, apply them gradually, not to slap on a flat 60% tariff.

And in any regard, and outside of just the personalities that we've seen, I've also seen some reporting from Reuters specifically that the Trump administration seems open to negotiation on tariffs in exchange for help in other regions.

The one that I saw notated in this article was in his discussions with Mexico and China for their help in combating the fentanyl opioid crisis and those drugs coming into his states that they could see relief on on tariffs if they, if they were able to show material gains and in helping with that issue.

Jeff McCarty: 00:10:36

And Jim, you made the point, I think Jim, you and Alex made the point that there's been tariffs in place through, you know, both the previous administrations too. Right. So certainly tariffs used as policy as nothing new in the recent past.

So as long as that continues and doesn't get too much more extreme, probably again, good for markets.

Jim Glennon: 00:10:59

Yeah.

There's precedent now, recent precedent, like you said with the Harris Biden administration did allow the Trump era tariffs to continue and those didn't seem to cause any major issues for markets. There's definitely was some hyperbole, as you said, Alex, during the election a couple of months ago, but I think that's being reined in quite a bit.

And the cabinet is looking to use tariffs strategically and kind of layer them in where it makes sense rather than try to shock the system and cause side effects like inflation, like the things you would worry about with new taxes.

Jeff McCarty: 00:11:32

Well, we'll get into that a lot more next week as well. So looking forward this week, we've got big monthly employment numbers at the end of the week. What else we got going on, Alex?

Alex Hebner: 00:11:42

Yeah, this morning we saw construction spending surprise to the upside up 0.4%. It was expected in at 0.2%. It was depressed for all of this year.

Until last month's release, we were seeing negative releases on construction spending, meaning that there was a contraction in new construction throughout the economy. And I think it's a good sign that construction spending is increasing month over month.

back to Levels that we saw in: 2023

But I think the biggest release for this week is the unemployment numbers. We'll get ADP on Wednesday as we always do and then followed by the non farm number on Friday from the Bureau of Labor Statistics.

I think that the non farm one is definitely the one at least on our desk that we keep a closer eye on. ADP Wednesday though expected to be 80,000 lower than last month. Last month for non farm was the big surprise when we saw 12,000.

And I remember we made, we made comments, you know, on the podcast back then about 12,000. What was 12,000 jobs in the grand scheme of things? You know, you know, that is, you know, if you're one of those 12,000, it's a big deal for you.

But in the grand scheme of things it very little, very little change throughout the economy in regards to job numbers. They're expecting 200,000 this time around. I want to say we're going to have a miss there.

It kind of seems like they're doubling down after, after missing last month. And I think, you know, I just said construction spending maybe tally one up for strong economy. Employment seems a little bit iffy.

You know, we've seen unemployment ticking up all year long. We're sitting over 4% for economy wide unemployment now.

You know, over the course of the year we've seen about 600, 700,000 up to maybe like a quarter, three quarters of a million new unemployed folks throughout the economy. So that's the number that I would keep an eye on is just continued unemployment ticking up.

Some of the sectors that have been hit most hard have been kind of the professional white collar sector, education and healthcare. They've seen the greatest rises in job loss this year. Just from a pure number standpoint, they make up over 50%.

Those sectors make up over 50% of that three quarters of a million that I was talking about. And then we've also seen some contractions in hospitality, leisure, construction itself.

I know construction spending went up, but we have seen a contraction in construction employment and then manufacturing.

And I don't think manufacturing should shock anyone when you look at just manufacturing sentiment numbers and manufacturing spending that comes out throughout the month. But there have been some improvements. Not enough to make up for those white collar and healthcare related job losses.

But mining, agriculture and certain financial and IT services have seen some, some gains there. So yeah, we'll have to keep an eye on that non farm number on Friday. That. That's kind of my number one metric at this point.

You know, inflation is quote unquote tackled, per Jerome Powell, or they're happy with where it's at. So.

So it's time to turn the page and start looking at that second mandate for the Federal Reserve and keep an eye on unemployment and how fast they're going to have to cut. This will be the last unemployment number before the final FOMC meeting of the year.

That one's on December 18th, just before we really get into the holidays and kind of the economy not really shutting down, but, you know, a lot of people taking time off to spend with their families during the holidays. Still leaning towards a 25 basis point cut. There it was.

About two thirds of forward contracts right now are showing a cut is expected for this December meeting. So that would leave us going to the new year with a target rate of 4 to 25 basis points.

Jim Glennon: 00:15:19

All right, good. Yeah, I think I like your points on the unemployment numbers. You have to look at the details. You can't put much stock in just one month's number.

The number does fluctuate quite a bit. There's also been a ton of revisions over the past year. And the jobs do seem to be coming from certain sectors right now.

And if you are in a white collar position, for instance, the unemployment numbers aren't very good. But there's other areas where the economy looks really strong and I think there's some. There's just some details to pay attention to there.

It's hard to. Hard to make a big deal out of a single headline number in one month.

Alex Hebner: 00:15:54

Absolutely. Well, perfect.

Jeff, I want to throw it over to you real quick on a topic that is pretty pertinent to our industry and the listenership of this podcast. I want to carve out a little bit of time to talk about that. And that's the FHFA loan limits.

They released the: 2025

Jeff McCarty: 00:16:18

Yeah, so numbers increased to $806,500. So an increase of almost $40,000 or 5.2%. So that's the standard loan limits. And then the high val. High cost area loan limits increased to 1,209,750.

So that is 150%. That number is 150% of the standard loan limit. Right. So that's, that's the formula that they use to set the high Val areas just as a reminder there.

And so, you know, those are the headline numbers. Getting into a little bit more detail.

You know, we kind of wanted to review what's, where do these numbers come from exactly what's been some of the historical numbers in the past. Why, why are they set the way they are?

and Economic Recovery act of: 2008

So coming out of the housing crisis, they explicitly came up with this formula to set these numbers, you know, at a high level. It's just reflecting changes in the average home price. So I'm going to read this off so I get this exactly right.

between the third quarter in: 2023

So basically that just means they're using their official HPI at the end of the third quarter in each year to figure out what it will the, the loan limits for the following year.

And so, you know, basically at the end of September they start calculating that HPI and then they know exactly what it will be for the following year. So it's a hard formula that they're using at this point and we'll get into this a little bit later because it's at the end of the third quarter.

That's why you start to see some aggregators quote, guess what the, you know, new loan limits will be. But because it's that hard formula, they, they can essentially know exactly what it will be once they know those hpi. HPI numbers.

Alex Hebner: 00:18:35

Right. It's always interesting how the, how the aggregators try and jump start, get a jumpstart on, on the new conforming loan limits.

And like you said, you said if they are using the same information as the government is, they're likely able to back into a number that's right around where it's going to land. Could you kind of walk me through why the aggregators might be looking to get a jump start?

I mean these numbers are going to come into effect until January 1st.

Jeff McCarty: 00:19:01

Yeah, the adoption timeline is something that's important here.

So if we kind of walk back from the January 1st to when they take effect, all the way back and this comes into play with really any type of announcement from the fhfa.

So what the FHFA does is they say these, in this example, the loan limits take effect for any loan funded through the agency cash window or any mortgage backed security issued after January 1st. So that means these loans starting January 1st, these are closed loans. Right.

These are good loans that have closed funded to the borrower are already being securitized.

And so if we start walking that back, of course you've got, you know, a delay between when the loan is securitized and when or should the cash window and when the loan funds.

Alex Hebner: 00:19:54

Right.

Jeff McCarty: 00:19:54

So you're talking anywhere from, you know, 15, 30, even more days there and then you've got the timeline between when the loan funds and when the loan has locked with the borrower. Right. So you're talking another 45, 60 days there. So you know, we got these new loan limit announcements at the end of November.

But practically loans that are going to be securitized on January 1st have already been locked with the borrower.

And certainly you've already been having discussions with the borrower, you know, way back into, you know, you're talking about August, September, even longer for long term locks of when these loans kind of started their life even before they were locked.

You know, really it's kind of a tight window this, this one month timeline between when the loan limits get announced and when they actually take effect. And so you know, aggregators, of course they want, they could easily be locking loans much later in the process.

So if they can guess it, they can start locking those higher balance loans knowing they're going to be under the conforming loan limit once they actually sell them to the agencies or once they actually securitize them.

Jim Glennon: 00:21:01

Right. So the punchline is they just want to have that small window of being extra competitive or having an edge or having a niche.

Jeff McCarty: 00:21:08

Yep.

Jim Glennon: 00:21:08

Yeah.

Jeff McCarty: 00:21:09

And that's again, I think this is kind of interesting. It's something that always comes into play, Right.

We saw it a bunch with some of the new LLPAs, some of these AMI LLPA waivers over the past couple years, a bunch of different things that FHFA and then the GSEs have announced. It's hard to kind of fit them into this timeline of this discrepancy of borrower lock.

And then when it actually gets sold to the agencies or when it actually gets securitized. But getting back in a little bit more on kind of the history of these loan limits.

Jim, you're the old guy in the room, maybe you can talk to us about what these used to look like back in the day.

Jim Glennon: 00:21:52

Yeah, I Mean, so you go back to, you know, the great financial crisis or right about then, and I think a lot of us who were in the industry then, we remember that the limit was 417,000 for most areas.

that way for many years until: 2016

But since then, those numbers have increased substantially every year, especially during the pandemic when rates were at all time lows. 20, 21, 22, 23, we saw 100,000 increase. In one year, we saw an 80,000 increase, 22 to 23.

So really seen some dramatic changes in that number that the FHFA has put out there. And that's caused a little bit of, I'd say not quite controversy yet.

But there's some folks who would say those changes might be working against affordability. Right. I mean, you can watch affordability plummet as these loan limits go up. And obviously correlation is not necessarily causation.

It's not the limits going up that's directly affecting affordability. But that argument could be made that it's not helping affordability. Right. It's helping people afford more and more expensive houses potentially.

I mean, if you look at the limit this year, that's just, that's being announced for 25, it's a close to a nice round number of just above $800,000, which at 80% LTV. Right. With 20% down, that that's a million dollar house.

So is the FHFA indirectly saying that that's about what a house should cost, a million dollars?

Which I think some folks who are having, you know, in lower cost areas would say, no way, that's not, that's not the, you know, that's not the kind of money that I'm prepared to spend or that my income supports.

So there are some, there are some arguments against continuing to raise these limits, but for now it's basically being run off of a, off of a formula. And it's essentially mandated for that, that number to increase as long as housing prices are increasing year over year.

So that is affecting affordability.

Jeff McCarty: 00:24:06

Yeah. Our friend of the podcast, Chris Maloney, has put some commentary out on this.

He kind of was conjecturing if the, you know, if the FHFA director had any sort of discretion to actually go against the formula. I think he, you know, he concluded that maybe there could be limited discretion where the director could over Overrule the formula.

But you know, essentially it is. Yeah, you know, that would call it cause so much controversy on its own.

So probably requires strong justification or even legislative changes to go against the formula for now. But you're right, I mean the loan limits close to doubling in an eight year period. Right.

You know, 417 for, for a really long time now up to 806, almost doubling this affordability issue. The FHFA and the agencies are trying to do a lot to promote first time home buyers.

But you know, when it is so easy to get a very expensive home for most people, you've kind of got this very much this on the one hand, on the other hand. And are these things working against each other?

Jim Glennon: 00:25:16

Yeah.

And as far as additional issues that I think can generally be caused by these limits continuing to increase and just the ease of borrowing using GSE loans or FHA or VA loans is it crowds out the private capital that previous to the great financial crisis was a major player in mortgages. And even this rhetoric has died down a little bit the last few years.

But after the financial crisis, Congress wanted private capital to come back and they wanted them to come back in a huge way. Like more than 50% of mortgages. Congress wanted to be backed by private money.

And there's just been no opportunity or no avenue for private money to come back into the market because the GSE and FHA financing programs are so low cost and so competitive.

Jeff McCarty: 00:26:07

Yeah, we've been talking about this for as long as I can remember certainly, and we saw maybe a little bit of it a couple years ago when, you know, when rates were low and you know, a lot of banks were looking for yield outside of Treasuries, when Treasury rates were so low they're able to get a little bit more yield in mortgages. But beyond that, you know, there's really been no meaningful, what I would call meaningful inroads.

Certainly Nowhere approaching the 50% number you mentioned.

Jim Glennon: 00:26:32

It's been more, you know, banks, credit unions, you know, buying loans or acquiring loans for their own portfolio. But there's been very little securitization of those loans. Right. So there's been very little capitalization from the secondary market.

Jeff McCarty: 00:26:45

On the other hand, you know, certainly these loan limits I think, you know, are one of the tools that have provided a lot of stability to our market.

You know, for everybody listening to the market, I think everybody's, you know, does that's to a certain degree appreciate the stability that we have had. And I think these are one of the tools that have provided that stability.

Jim Glennon: 00:27:06

So yeah, one of a kind in the world.

Jeff McCarty: 00:27:10

Yeah, yeah, absolutely.

Jim Glennon: 00:27:12

There's no other part of the world where you can get a 30 year fixed mortgage period with the kind of rates that you see in this country. So there's certainly a reason that the GSEs exist and a big reason was to create stability and affordability.

Jeff McCarty: 00:27:27

All right, so to wrap it up, you know, the announcement, the announcement of the new loan limits came out last week. Most rate sheets, most pricing engines probably have already incorporated these. If not, they will certainly be doing so in the next several days.

So certainly, you know, at this point probably able to take advantage of those higher loan limits. Although, you know, a more modest increase than we've seen the past several years. Still a decent little jump here.

You know, 5% jump certainly might open up a few more opportunities.

Jim Glennon: 00:28:02

All right, great conversation for our listeners today. I appreciate that. Thank you, Jeff. Thank you, Alex. Let's wrap this podcast up. Please do. Make sure you register for the summit.

Pay attention to the unemployment report comes out this Friday, 8:30 Eastern Time. And as promised next week we're going to have some pretty in depth discussion about tariffs. Just what are they? What's the history of them?

How might tariffs affect the market? Should be a super lively discussion. So tune in for that. And that's it for today.

Join us next week for another episode of Optimal Insights, where we'll continue to provide you with the latest market analysis and insights to help you stay ahead. Don't forget to follow us on LinkedIn for more updates and to access our latest video episodes.

You can also find each episode on all major podcast platforms. Thanks again for tuning into Optimal Insights.