Should we bring back higher FHA loan limits?

by Peter G. Miller
July 18th, 2011

There’s no surprise about this one, a lot of people are unhappy with the new mortgage loan limits set to start Oct. 1, 2011–loan limits which are lower than today’s standards.

“The housing market does not need a self-inflicted wound,” said Rep. Gary Ackerman (D-NY), a co-sponsor with Rep. John Campbell (R-CA) of legislation which would keep today’s loan limits in place. “With the economy remaining fragile and the housing sector still struggling to recover, now is not the time to make the cost of mortgages more expensive.”

Under HR 2508, loan limits for FHA and conventional loans would stay where they are until 2013.

Is increasing loan limits a good idea?

For most people it simply wouldn’t matter. Most mortgages are far below current loan limits so the question is irrelevant.

However, the issue is very important for people who live in high-cost areas where it makes a big difference if the loan cap is $625,500 versus $729,750. In these areas there are many homes where prices are so high that financing of $729,750 is actually used.

Another group that would be elated if the loan limits were continued are the nation’s home builders. They’re advocates of higher limits because that makes the sale of McMansions easier to finance.

Change in Washington

The odds of such legislation actually passing, however, are not so great. Here’s why:

The plans for lower loan limits are already in place and it would take new

legislation to raise the Oct. 1, 2011 standards. Getting things done in Washington is unlikely, especially since much of the House would not support higher mortgage loan limits and the White House has said it agrees with the lower mortgage limits. Critics of the Federal Housing Authority (FHA), in particular, would not want limits increased because they want to make the FHA mortgage program less competitive in the marketplace.

What’s more plausible is that the conventional loan limits we now have could be continued while the FHA loan limits would be allowed to fall. This would make a lot of people very happy because they object to the FHA’s large market share and a lower FHA loan limit is one way to reduce FHA demand.

What’s missing from the loan limit debate is the fact that bigger loans are available today and will be available after Oct. 1. Bigger loans–”jumbo” financing–are more expensive than “conforming” mortgages which do not exceed the loan limit. In other words, the problem is not that financing will be unavailable, it’s that some of it will cost a touch more.

If the new loan limits go through as expected it means that mortgages above $625,500 in the lower 48 states will be reclassified as “jumbo” financing and thus lenders will be able to charge a higher interest level. Curiously, there doesn’t seem to be a lot of support for a continuation of the higher loan limits among lenders, usually a loud group in Washington.

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