Higher FHA Loan Limits For Big Cities Proposed

by Peter G. Miller
August 11th, 2010

As if the loan limit system for FHA loans is not sufficiently complex, Sen. Charles E. Schumer (D-NY) has proposed a new loan limit for apartment units financed with FHA-backed loans.

At this time the FHA cap is $214,421 per unit for high cost areas, yet the average cost per unit in New York City is $419,000 according to Schumer. As you can guess, there’s not a lot of FHA financing being used to create new units in the Big Apple or other high-cost metro areas. Schumer says that in 2006-2007 only three high-rise multi-family development projects were insured in the city by the FHA.

Valentine Avenue, New York

“Cities like New York have been losing out for too long on FHA backed loan guarantees for the construction of multi-family housing, because development costs are much higher in major metropolitan areas than they are in the rest of the country,” said Schumer. “My legislation will give the HUD Secretary the ability to raise the cap to better reflect the realities of construction costs in New York.”

I can easily understand Schumer’s position — he is, after all, the senator from New York. But rather than add another layer of complexity to the problem, why not go the other way, why not simplify the system?

Consider conventional loans. It used to be that we had two sets of conventional loan limits, one for the 48 continental states and one for Alaska, Hawaii, Guam, and the Virgin Islands. If you were reasonably sober you instantly knew which loan limit applied to a given property just by its location.

Now we have a convoluted loan limit system with basic loan limits, loan limits for high-cost areas and, of course, loan limits for higher-cost communities. There are separate limits for VA loan and the FHA mortgage guidelines include a loan limit scheme which requires a degree in advanced mathematics to understand.

Schumer, apparently, feels that the current loan limit system is insufficiently complex and therefore wants to add still-another definition to the pile.

The new proposal, says Schumer, “would provide the Secretary of HUD the authority to designate “High Cost Areas” and “Extremely High Cost Areas” categories for FHA Multifamily Insurance. This authority already exists for certain States and territories including Alaska, Hawaii, Guam, and the Virgin Islands. The legislation requires that FHA economists vet the credit eligibility before insuring a multifamily loan. As a result, this legislation does not alter underwriting criteria or weaken taxpayer protections. Rather, it is intended to give high cost cities the same access to FHA Multifamily Insurance that regions with lower cost markets already utilize.”

Translation: To build a new apartment on Park Avenue you need a higher FHA loan limit.

The alternative idea is this: We now have tough FHA mortgage guidelines in place. We have a good appraisal system. Why don’t we just say there’s one loan limit system for the entire country, say the one now used in Guam. That would work for just about everyone — and just about everyone would be able to understand how much FHA financing is available, just like the good old days.

Photo of Valentine Avenue, The Bronx. Copyright 2009 Peter G. Miller, All Rights Reserved. Used With Permission.

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