FHA & New Loan Limits

by Peter G. Miller
August 5th, 2009
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For a number of years you could depend on Fannie Mae and Freddie Mac to change the loan limits for conventional loans each winter. There were some guidelines involved, but it didn’t matter because if the market didn’t go up and justify higher loan limits then the guidelines were ignored.

Following in that tradition, the House has now passed HR 3288, legislation which would continue this year’s FHA loan limits through next year — but lower the limits for FHA reverse mortgages.

In basic terms, here’s what the bill provides:

First, HUD is now allowed to insure FHA mortgages worth up to $400 billion. This is a huge increase, up from $315 billion last year.

Second, the bill continues the mortgage loan limits from fiscal 2008. This means the FHA mortgage loan limits can be as high as $729,750 in certain areas. The caution here is that loan limits vary by local area so always check the limits for your community on the official FHA loan limit page.

Third, the legislation says that the loan limit for an FHA reverse mortgage — with a huge red flag — remains $625,500.

Okay, so what does this stuff really mean?

The increase in FHA funding authority means the government is following the marketplace. FHA loans now represent some 35 percent of all new financing, up from about 5 percent just a few years ago when the program was crowded out of the marketplace by toxic loans. It would be counterproductive (okay, idiocy) to restrict the program when FHA mortgages enjoy great public confidence, especially FHA loans for people with bad credit. In this economy we need buyers, reason enough to encourage people to enter the marketplace.

The continuation of loan limits in general and FHA loan limits in particular is a political necessity. To lower those limits would further restrict home sales in the nation’s high-cost housing markets. That’s just not going to work in Washington.

As to reverse mortgages — what HUD calls home equity conversion mortgages (HECMs) — those loans remain attractive for many borrowers — but have become troublesome for HUD to insure because of falling home values.

While HUD asked Congress for $800 million to subsidize the reverse mortgage program this year, Congress in this bill is saying forget it. Instead of more money, the bill requires HUD “to ensure that the program operates at a net zero subsidy rate.”

Given that reverse mortgage are amazingly risky to insure in a slow market what can HUD do to meet the net zero requirement? It can cut back on the number of reverse mortgages it’s willing to insure, it can reduce the maximum amount it will cover, or both. The bottom line: If you want an FHA-insured reverse mortgage it might be best to get one before October 1st, the start of the new fiscal year.

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