Could higher FHA loan limits stay after October 1?by Peter Miller
Conservative writer David Frum thinks today’s higher FHA loan limits should expire October 1st, as they are scheduled to do.
This perspective raises a question:
If FHA loan limits are due for reduction as of October 1st, then why would a political commentator suggest in mid-August that lowering FHA mortgage maximums is something that needs to be done?
Limits for the FHA mortgages not a done deal
The answer is that lower loan limits for the FHA mortgage program are not a done deal.
There’s a real possibility that quickie legislation could result in the maintenance of today’s mortgage loan levels after October 1st when, for example, the FHA loan maximum for high-cost areas is scheduled to be reduced from $729,750 for a single-family home to $625,500.
For instance, Rep. Gary Miller (R-Calif.) has introduced the Preserving Equal Access to Mortgage Finance Programs Act, a bill supported by many in the real estate community:
“If we look to the dramatic increase of FHA’s market share over the past few years, we can see how essential the program is for our nation’s economic recovery,” NAHB First Vice Chairman Barry Rutenberg, a home builder from Gainesville, Fla., told the House Financial Services Subcommittee on Insurance, Housing and Community Opportunity.
“This striking shift is evidence that FHA is performing its mission of providing the federal backstop to ensure that every qualified American home buyer has access to a stable mortgage product,” said Rutenberg.
Preserving special interests
Actually, the real reason to retain high FHA loan limits is to support segments of the real estate industry; that is, special interests.
First: In high-cost markets such as New York, Boston and much of California, high-loan limits help stabilize local home prices.
In other words, HR 1754 seeks to preserve “equal access” to low-cost loans by rich homeowners. Most FHA borrowers could care less. In July, according to HUD, the FHA insured 91,533 single-family loans for $16.1 billion.
That’s an average of just $175,893 per borrower.
Second: More FHA loans mean more loans with a 100 percent government guarantee against failure.
FHA mortgages done right are cash machines for the lending industry. You make a loan that correctly conforms to FHA standards, you collect a fee, and if the loan fails that’s HUD’s problem.
In 2008–just two weeks after the presidential election–the outgoing Bush Administration issued a regulatory statement that ended lender fee limits on FHA loans.
Third: Wall Street wants more FHA loans because such financing, regardless of mortgage rates, is used to create mortgage-backed securities that can be sold worldwide with great profits. A larger loan supply means more securities can be originated.
Will loan limits remain in place after October 1st?
It seems likely that we are on course for lower loan limits for several reasons:
- Necessary legislation to lower loan limits is in place.
- New legislation is very tough to pass.
- Despite public comments to the contrary, you can bet that a number of players in Washington are quietly happy with the lower loan limits. In this thinking, lower FHA loan limits mean fewer FHA loans, a central goal of the make-government-smaller movement.
- A lot of congressional representatives are not from high-cost real estate areas. They have no incentive to seek higher FHA loan limits.
There is, of course, no public outcry one way or another in this matter, no mass demonstration on the Mall by thousands of borrowers seeking higher loan limits or–for that matter–lower ones.
What the public would really like are lower mortgage rates and smaller closing costs, items somehow not up for discussion….