October 6th, 2011

Concerns over lower loan limits for FHA are overstated

by Peter Miller


Treasury Dollar BillThe decision to reduce mortgage loan limits has set off a spectacular level of negative reaction. But a look at the facts and the numbers tells us there’s little cause for concern.

Claim: FHA will suffer…

Last week, Matthew Dornic of Huffington Post writes that the FHA program may especially be in trouble:

In less than a week the home buying power of millions of Americans will be crippled by an average of $68,000. Some markets will experience declines as high as $250,000. That is, unless Congress intervenes before Oct. 1 when the limits for loans backed by the Federal Housing Administration (FHA) are set to shrivel to pre-crash levels.

…Groups like the NATIONAL ASSOCIATION OF REALTORS® (NAR) and National Association of Home Builders (NAHB), who fear the nation’s housing market will be held hostage by Wall Street’s terms and interest rates should an FHA loan limit extension fail to pass. Supporters of an extension point out that the FHA mortgage insurance program is self-sustaining–it’s never required direct funding from Congress and therefore comes with no cost to the taxpayer.

The claim that “the nation’s housing market will be held hostage by Wall Street’s terms and interest rates” is a curious one.

I say: “I’m not so sure that’s true”

I have to ask:

How is that any different than today or yesterday? Where was the concern about “Wall Street” when option ARMs and interest-only loans were being sold to borrowers and used to create high-profit mortgage-backed securities?

To have “millions” of Americans financially crippled by the October 1st reduction in FHA loan limits assumes that there must be millions of Americans with FHA loans that need financing above $625,500–the new ceiling for most high-cost areas. (The old ceiling was $729,750.)

Numbers never lie

In fact, figures from HUD tell a wildly different story.

As of mid-September, there were 7.152 million FHA loans outstanding. Of this number, 0.75 percent were for loan amounts above $500,000.

That’s roughly 53,640 loans across the entire U.S., including Alaska, Guam, Hawaii and the Virgin Islands where FHA loans of as much as $1,094,625 have been available for single-family homes.

Notice that mortgages above $500,000 will still be available in high cost areas with the new loan limits. The actual impact of the new limit schedule will be far less than 0.75 percent of all FHA loans.

Most people, of course, have absolutely no loan limit concerns.

NAHB and NAR worries

In August, HUD reports that 100,490 FHA loans were endorsed. These loans had a total balance of $17.4 billion. That’s an average of $173,151 per loan.

For its part, the NAHB makes a reasonable case for the retention of higher loan limits.


NAHB release (9/19/11): “Builders Call on Congress to Extend Loan Limits”:

“Congress must act now to prevent the loan limits from reverting to lower levels,” said NAHB Chairman Bob Nielsen, a home builder from Reno, Nev. “A drop in mortgage loan limits would reduce housing demand, and place downward pressure on home prices in major markets. This would exacerbate the current housing downturn, trigger more foreclosures, impede job growth and endanger the fragile economic recovery.”

You can debate Nielsen’s views, but they’re hardly claims of forthcoming housing doom.


At NAR, the worry has been more exaggerated:

“NAR supports efforts to strengthen FHA and reduce its current market share; however, changes should not be made at consumers’ expense by drastically impacting the availability and cost of mortgage capital for millions of Americans, especially while the housing market recovery remains fragile.”

Drastically impacting millions of Americans?

Influence of FHA’s reduction will be minimal

A reduction in the maximum limits for FHA loans will concern only a small number of borrowers in high-cost markets. The impact on mortgage rates will be zero because the total number of big FHA loans involved is tiny relative to the home loan universe.

And logically, if the NAR supports efforts to strengthen the FHA and reduce its current market share, then wouldn’t a lower loan limit result in fewer FHA mortgages?

That sure sounds like less market share to me….

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2 Responses to “Concerns over lower loan limits for FHA are overstated”

  1. Bridgett Hard Says: October 6th, 2011 at 9:49 am

    It is just not impacting the JUMBO loans–it impacts loans at the median home levels in many counties. We sold our home at a loss – due to market devaluation–and so we do not have 50,000 to put down on another home–FHA allows us to purchase with 3.5%–however, finding a home for 271,000 in our county is quite difficult where the median house value is 299,000–until October 1–the loan limit for FHA in our county was 302,500–

  2. Peter G. Miller Says: October 6th, 2011 at 1:43 pm

    Is it also true that not only have FHA loan limits in your county declined, but also home values?

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