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Why do FNMA and FHLMC announce new loan limits for one to four-family loans?

  1. Is there a justification to have something called "conforming" loans as opposed to "jumbo" loans?

  2. Is this to separate on the size of the loan? Can someone who knows the history to this perhaps point to a reliable source of reference?

  3. Do you think this categorization helps or hurts lender or borrower in any way in the US residential mortgage market?

  4. The way I understand is that conforming loans are cheaper for borrowers due to its ease for lender to package them to MBS or sell them to Fannie Mae and Freddie Mac. Any other reason why we categorize in such way?

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  • Your questions sound a lot like homework (or, at the very least, some sort of continuing education).
    – RonJohn
    Oct 5, 2019 at 2:53
  • @RonJohn I am studying mortgage underwriting, but never ask any homework related questions. I am trying to better understand the US mortgage market myself, but there are a lot of history and jargon in the market, so any seasoned person answer my question. FYI, asking homework question really hurts the learner; you don't get anything out of it.
    – Frank Swanton
    Oct 5, 2019 at 2:56

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Broadly speaking, FNMA and FHLMC allow the government to ensure liquidity in the mortgage market (by ensuring that lenders have a guaranteed buyer of conforming loans) and to provide a small subsidy on mortgage rates. The intention of loan limits is to ensure that these subsidies are focused on "middle class" borrowers rather than the super wealthy. If Bill Gates wants to buy a $30 M house, the government doesn't want to subsidize his rate. And the government assumes that banks aren't going to need the FNMA and FHLMC as a guaranteed buyer in order to extend loans to the wealthy. So FNMA and FHMLC announce conforming loan limits that vary based on the number of units and by county (giving higher limits for high-cost areas) that, ideally, help ensure that middle class borrowers can get mortgages. Of course, it also helps lenders that are writing conforming loans by ensuring they can sell them more or less immediately after they're written rather than having to hold loans on their books until they can arrange a private sale.

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