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$417,000 is the maximum amount for single family residence loans eligible for purchase by the Federal National Mortgage Association (FNMA "Fannie Mae") or the Federal Home Loan Mortgage Corporation (FHLMC "Freddie Mac").
These are the two Government Sponsored Enterprises (GSEs)
that buy the majority of all non-government-insured (conventional) mortgages originated in the US. They provide liquidity to the overall mortgage market by doing this.
Let's start with a little background on US mortgage markets.
Lenders and banks make mortgage loans directly to buyers in the Primary Mortgage Market, then sell those loans to the GSEs and other large investors in the Secondary Mortgage Market so they can get their money back and lend it again to new buyers.
Selling individual loans directly to the GSEs is considered the quickest, least costly, most effective way for banks and lenders to have profitable cash flow from mortgage originations.
Secondary investors receive the income from mortgage payments made each month by individual buyers as their return on the investment.
Since the GSEs buy the loans, they get to set the qualifying limits and standards for what they will buy, which include:
- Borrower qualification (credit scores and debt-to-income ratios)
- Property use (primary, second home, investment)
- Loan-To-Value (LTV) ratios
- Maximum loan amount
Loans meeting GSE standards are called "conforming".
The conforming limit is calculated each year using the national median single-family home value from the previous year as a primary input. For 2015, $417,000 is the maximum individual loan amount the GSEs are comfortable buying and holding.
Loans larger than the current conforming limit
have been nicknamed Jumbos.
Loans whose amounts, qualifying details, and ratios fall outside GSE guidelines are non-conforming and addressed in one of the following ways:
- held in the lender's own portfolio of investments,
not sold to Secondary
- bundled into Mortgage Backed Securities and sold
to large institutional investors like investment firms,
mutual funds, insurance companies, pension funds,
and other large buyers
- government-insured or guaranteed (FHA, VA, USDA),
then bundled together into Mortgage Backed Securities
and sold to large Secondary investors
Jumbos are either held in a lender's own portfolio or bundled into a MBS with other Jumbos having similar terms and interest rates.
Like the GSEs, large non-GSE institutional Secondary investors also set the limits and standards for the loans included in the MBSs they will buy.
Some Secondary investors impose stricter standards, some allow more lenient standards, depending on their own internal risk management and the return they're seeking.
The risk and return these investors receive is directly tied to the relative risk of the individual mortgages included in the bundle.
Secondary investor overlays (specific or additional require-ments for the loans they buy) have a huge influence on what loan programs and interest rates are available to the public at any given time.
In reality, buyers qualify according to the Secondary investor's guidelines, which are passed through to the primary lender and become an integral part of the lender's own guidelines.
Lenders play by Secondary's rules,
or the loan stays in the lender's own portfolio.
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