How big is too big?

Sometimes what seems like a great idea may not be in the long run. Kind of like that Jaguar you had to have when you were 18; it looked pretty, but it was always in the expensive foreign car repair shop.

Last week’s big financial announcement from the federal government was the increase in Fannie Mae and Freddie Mac’s mortgage loan eligibility. What does that mean? It means that the federal government is now backing mortgages for over $1 million for the first time. Remember that Fannie and Freddie don’t make loans. The companies are under government control and have been since 2008 for a good reason. They buy mortgages from lenders and package them into securities that are sold to investors. In 2008, when loose lending practices created a bubble of foreclosures, these investors lost big time, crashing the stock market and almost our economy.

Fannie and Freddie’s mandate when the government programs were established was to guarantee middle-class mortgages and make housing more affordable for the average buyer. Because of this, not everyone in the financial community is on board with the government insuring even larger home loans geared more to the wealthy and further increasing taxpayer liability.

Fannie and Freddie’s loan limit, which is known as the conforming loan limit, will now be a high of $1,089,300 in high-cost areas, up from $970,800, and $726,200 up from $510,400 in other parts of the country. The high-cost areas are mostly the California and New York coastlines with some pockets in other areas of the country. All Florida counties with the exception of Monroe County, which encompasses the Keys, are at the $726,200 limit.

Loan limits are determined every year using a formula that factors in the average housing prices. This year, about 100 counties in the country are determined to be high-cost markets out of approximately 3,000 counties. The increases in the loan limits may make it easier and cost less for borrowers purchasing single-family homes. Conforming loans usually have lower closing costs and can require lower down payments than residential mortgages that go over the loan limits.

With higher mortgage rates and higher asking prices for homes, many prospective buyers have been unable to qualify for loans or had to reevaluate their buying criteria. Fannie and Freddie argue that raising the loan limits is necessary in order to reflect the higher home prices and the higher interest rates. They view their job as needing to keep pace with home prices to address affordability.