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What About Raising FHA Loan Limits?

by Peter G. Miller
October 19th, 2007

As reported a few days ago, the FHA loan limit will remain the same in 2008 unless some form of FHA modernization passes in Washington.

This is a matter of some griping because the FHA program has little value in the nation’s more expensive metro areas such as New York, Boston, Washington and much of California. The tension here is whether to raise the FHA loan limits so that more borrowers in truly high-cost areas can have access to the program.

On one side are those who argue that the loan limit should be increased because that would create more demand for local properties. On the other side are those who believe that the FHA is really intended to be a program for those with low and moderate incomes. Raising the FHA loan limits, say opponents, would merely create a new benefit for those who already have substantial financial resources.

This is one of those arguments where I am an agnostic. I can see that both sides have a point. However, what concerns me is not so much the idea that low limits might be raised, rather it is the combination of higher loan limits in smaller or nonexistent down payment requirements as some bills on Capitol Hill would permit.

Such combinations of more debt and less equity seem out of place for what is fundamentally a mortgage insurance program. Surely the idea of an insurance plan should not be to maximize risk. Alternatively, those who wish to buy real estate should have some chips on the table.

Forgive me, but I have this notion that buying real estate should represent risk for both borrowers and lenders, or in the case of the FHA, borrowers and insurance plans. I don’t think it’s unreasonable to ask people to share the risks of ownership, especially when you consider that buyers get 100% of the new equity when values go up – and the FHA gets none.

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This entry was posted on Friday, October 19th, 2007 at 12:49 pm and is filed under , . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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