Lower loan limits won’t make a significant impactby Peter Miller
New limits may only last three months
The catch, of course, is that the limits set to start on October 1, 2011 are also set to end on December 31, 2011, meaning the debate regarding loan limits will not be over regardless of what happens at the start of next month.
In basic terms, the top conforming and FHA loan amount is going from $729,750 to $625,500 in “high cost” areas within the lower 48 states. The FHA reverse mortgage limit and VA loan limits remain unchanged.
New limits won’t change much
Those who oppose the lower loan limits maintain that more financing is needed for high-cost areas. Proponents of the lower limits believe they will result in less risk for lenders, mortgage insurers and mortgage investors.
It’s my opinion that lower loan limits are likely to have an insignificant marketplace impact.
How are FHA loans performing?
We asked HUD for the latest available figures regarding FHA loans, market share and foreclosures. Here’s some of the data we received:
- Total number of FHA loans outstanding: 7,152,014
- Total percent past due: 15.18 percent
- Total percent in foreclosure: 2.47 percent
Well OK, but what about big loans? How do they compare?
- Total percent of FHA loans with initial balances from $400,000 to $500,000: 1.08 percent
- Total percent past due: 10.37 percent
- Total percent in foreclosure: 2.01 percent
It’s important to mention just how successful the FHA program has been. The Mortgage Bankers Association reports that at the end of the second quarter, the foreclosure rate for prime fixed loans was 2.56 percent, while the rate for prime ARMs was 9.16 percent.
FHA loans above $500,000
The FHA numbers tell us that while big loans are allowed, there are few of them and that they have performed well, better than loans in general. The point is best emphasized when you look at FHA loans with an initial mortgage amount above $500,000.
- Total percent of FHA loans with initial balances above $500,000: 0.75 percent
- Total percent past due: 7.42 percent
- Total percent in foreclosure: 1.32 percent
Big loans perform better in general than their smaller counterparts. If risk is an issue or a cause for higher mortgage rates, then as a lender you really want bigger loan amounts since they have relatively fewer foreclosures.
Small loans also performing well
The FHA numbers also tell us something else: Really small loans are also top performers:
- Total percent of FHA loans with initial balances from $10,000 to $50,000: 5.14 percent
- Total percent past due: 14.44 percent
- Total percent in foreclosure: 1.86 percent
The figures for small loans tell us that borrowers with such financing tend to fall behind less often than FHA borrowers in general. They also say that small loan delinquencies have a remarkably high “cure” rate, meaning that relatively few go to foreclosure.
Lenders, of course, charge higher mortgage rates for “jumbo” mortgages, and given the figures above, you have to wonder why.
Why charge more for jumbos?
Do jumbo loans have higher rates of delinquency or foreclosure?
What, exactly, makes jumbo mortgages more expensive when the numbers suggest that they are actually safer than smaller loans?
Again, whether loan limits rise or fall, the marketplace impact is likely to be minimal.
There just are not that many big loans in the first place and the big mortgages that are out there have few problems and few foreclosures.