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Are Bigger FHA Loan Limits Ahead?

by Peter G. Miller
January 14th, 2009

There’s growing talk in Washington that the FHA loan limit may again be lifted, a way to help buyers and sellers in high-cost communities.

According to the Bloomberg news service, “President-elect Barack Obama agreed with House Democrats to increase the limit on loans Fannie Mae and Freddie Mac can purchase to $729,750 in high-cost areas, House Financial Services Chairman Barney Frank said.”

The idea of higher loan limits has been strongly supported by Rep. Frank. The probability is that if Fannie Mae and Freddie Mac are allowed (or forced) to raise the conventional loan limit that the benchmark would also rise for FHA mortgages.

What happens in Washington, however, is not the whole story. The real question is whether the marketplace will be thrilled to see loan limits rise.

For example, as this is written you can get a 30-year fixed rate loan for 5.01 percent plus .6 points according to Freddie Mac. Go over the conforming limit, however, and you may well be looking at an effective rate that nears or tops 7 percent.

Why such a difference? Risk. Mortgage investors are okey with fixed-rate, vanilla conventional loans — but hardly sure about loans above the $417,000 conventional loan limit.

It’s not so much that jombo loans are simply bigger, it’s that the market for more expensive homes differs from typical areas. The reason, as I explain in books and columns, is two-fold: First, the pool of buyers gets smaller as asking prices rise. Second, buyers generally want the least expensive home in the most expensive market they can afford. If a jombo loans means buying a home which is expensive relative to the neighborhood that property can be tough to sell in the event of a foreclosure — and that makes mortgage investors very uncomfortable.

The view here is that higher loan limits are a done deal — if the incoming administration and Mr. Frank agree, then the odds are overwhelming that bigger loans will be available in the near future, say within the coming six to 12 months.

Whether they will be affordable is a different issue, regardless of what anyone in Washington might think.

For the full story from Bloomberg, please go to Frank Says Obama Backs $729,750 Fannie, Freddie Limit

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This entry was posted on Wednesday, January 14th, 2009 at 2:50 am and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

One Response to “Are Bigger FHA Loan Limits Ahead?”

  1. Chandler Real Estate Says:

    I’m torn on this issue. On the one hand, I see a benefit to raising conforming limits in our own market in the Phoenix area so as to make some more expensive homes more appealing and also have some impact on custom homes. That’s assuming that limits here in the area would get raised when indeed they may not.

    On the other hand, the limit is high already given that most of our market activity is well in the sub-$350K segment. As well, the challenges with jumbo loans may be one element that is driving pressure for lower prices on homes and in the long-term, I believe that is better for the area.

    Regarding the tie in to FHA limits, the one area where I believe markets could benefit is to reinstitute down payment assistance but in a more controlled and limited fashion (but without additional cost structures added to the buyer). This would be a temporary measure to spur renewed buyer activity but also address SOME of the concerns that DPA users are less reliable borrowers.

    Thanks for the post here. David Lorti

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