Will New Legislation Lead To Higher FHA Loan Limits?

by Peter G. Miller
January 19th, 2009

Could we see rising FHA loan limits?

in the past 18 months the maximum FHA loan for a home in the lower 48 states has ranged from $417,000 in 2007, to $729,750 in 2008, and on to the 2009 loan limits which are generally $417,000 except for high cost areas where the maximum loan amount is $625,000.

Now there is a call on Capitol Hill to revert back to the 2008 FHA loan limit. A bill in Congress, H.R. 587, would restore the maximum loan amount to $729,750.

According to the bill’s sponsor, Rep. Gary Miller (D-CA), the 2008 maximum loan amount, which was temporary, need to be continued. Why?

“Under the Economic Stimulus Act of 2008,” according to Miller, “the loan limit for both programs was temporarily increased to $729,750, depending on an area’s median home price. With the help of this Act, FHA is now playing an increasingly important role in providing affordable single family mortgage loans. In fact, FHA has now insured over 14,000 mortgage loans in California and now comprises over twenty percent of the housing market.

“The temporary increase, however, expired on December 31, 2008 and the loan limits in numerous California counties have subsequently decreased due to the Department of Housing and Urban Development’s resetting of county median home prices. Specifically, loan limits for 38 California counties have decreased by an average of $85,000 and 55 counties by an average of $104,000. By decreasing the GSE and FHA loan limits, the cost of buying a home in California and across the country will increase, ultimately exacerbating problems in the housing markets.”

The real point, of course, is that Miller’s bill is not just limited to California. You can also find large swaths of high-cost housing in Massachusetts, New York, Maryland, Virginia, Texas, Illinois, Florida and Connecticut. Put these states together and you have a large number of senators and representatives who will support Miller’s bill.

The question is what happens if such legislation is passed. Congress can create whatever loan limit it wants but mortgage investors cannot be forced to buy such notes. Without investors dollars, bigger loans will be difficult to get if not more costly. At this time, for example, a conforming 30-year mortgage may well be available at around 5 percent while jumbo borrowers are looking at rates at or near 7 percent.

Expect H.R. 587 to pass sometime this year. What happens next will be up to the marketplace, and right now the marketplace is not too thrilled with big loans.

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