Will the FHA Mortgage Limits Get Raised?

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From the HUD Mortgagee Letter 2007-01

The National Housing Act provides that the mortgage limit for any given area shall be set at 95 percent of the median house price in that area, as determined by the Department of Housing and Urban Development, except that the FHA mortgage limit in any given area cannot exceed 87 percent of the Freddie Mac loan limit ($417,000) for a one unit, ($533,850) for a two unit, ($645,300) for a three unit, or ($801,950) for a four unit, nor be lower than 48 percent of the Freddie Mac loan limit for a residence of applicable size.

Sounds complicated, but it boils down to the FHA limits being between $200,160 and $362,790 depending upon the area you live in. Except in Alaska, Guam, Hawaii and the Virgin Islands where the limits care based on 150% of the median price.

One of the most frequent complaints from borrowers and lenders is that the FHA programs, including the new FHASecure initiative, are useless in areas such as California and New York where home prices and mortgage balances are significantly higher.

There is a proposal now pending in the U.S. Senate Banking Committee that would raise government home-loan limits in these high-priced markets. HR 1427, already passed in the House, would allow Fannie Mae and Freddie Mac to securitize and sell loans of up to $625,000, or 150 percent of the conforming loan limit of $417,000, in areas where the median home price exceeds the conforming limit. Because the conforming loan limit is also the index for the base and high-cost limits for loans insured by the Federal Housing Administration, the FHA limit for a single-family home in most of these high priced areas is limited to $362,790, which is the high-cost area ceiling.
There is also another bill passed by the House and also, like HR 1427, now pending in the Senate Banking Committee. This bill, HR 5121, would allow the FHA to insure bigger loans with more-flexible terms, including no-money-down products, which is expected to help the agency regain market share in high-cost areas like California and New York. Currently, FHA loans require a minimum 3 percent down payment.

Many of the losses caused by subprime mortgage interest rate resets are concentrated in these high priced markets. The damage done to a borrower’s finances by a 1% to 3% increase in the interest rate is, of course, much worse when the loan amount $600,000 than when the loan amount is $150,000. Time is running out for our elected officials to pass some version of these bills. According to a March report by investment bank Credit Suisse Group, there are roughly $300 billion of securitized subprime mortgages scheduled to reset in 2007, with $500 billion in total mortgage debt scheduled to reset during the year. According to that report, the peak of the adjustments in the subprime mortgage market will occur between September and November of 2007. These bills, in combination with the FHASecure Initiative could go a long way toward stemming a lot of pain in the home buying and lending markets, without the need for any government bailout of borrowers or lenders.