Without Congressional action before the end of the month, FHA loan limits are set to fall to the same levels they were at before the housing meltdown, which could send another jolt through an already ailing housing market just when the recovery can least afford it.
For more than 75 years, the FHA has made home ownership a reality for millions of creditworthy Americans who don’t make the cut for a traditional bank loan. For example, FHA offers qualified home buyers financing with as little as a 3.5% down payment and a credit score as low as 580, allowing borrowers who take an FHA-backed mortgage to pay a premium of roughly 1% annually. Borrowers with nontraditional credit histories may also be eligible for maximum financing.
Since the collapse of the subprime mortgage bubble, the program has played a substantial role stabilizing the housing market. In an effort to boost liquidity in the market, Congress wisely raised the FHA loan-limit caps to $729,750.
Allowing the loan limits to now drop to $625,500 from $729,750 in certain areas will squeeze qualified home owners out of the market. Loan limits vary based on the median home price in an area, which is also going to drop from 125% of median to 115%. This reduction will affect people taking out much smaller loans as well. In fact, the new limits will affect 669 U.S. counties in 42 states.
Leading housing groups have already noticed the potential impact if Congress does nothing. Applications for mortgages between $625,500 and $729,750 fell 34% in August, says the Mortgage Bankers Association. In 2010 alone, lenders originated $30 billion in loans for properties in this bracket. This represents a sizeable chunk of the market that needs to remain intact. We’re more than three years into the housing slump and home sales remain weak, and yet Congress is putting the housing market in further peril.
During a Senate Banking Committee hearing, housing experts warned against reducing the limits until the market bounces back. Even Mark Zandi, chief economist for Moody’s Analytics, who originally supported allowing the limits to expire, told The Wall Street Journal this isn’t a good time for the government to stop helping home owners. “Given what’s happening in the housing market and the economy, I think that’s an error,” Zandi said.
Fortunately, a bipartisan group of representatives, led by Rep. Gary Ackerman (D-NY), has proposed a short-term extension of the limits. “Without the current limits, fewer mortgages would be eligible for the guarantees provided by Fannie Mae, Freddie Mac, and the Federal Housing Administration,” Ackerman wrote.
Urging the House Appropriations Committee to attach the measure to a stop-gap funding bill, the group hopes the provision passes before the end of the month. If the short-term extension is passed, Congress can see if the housing market improves. It would be preferable for Congress to extend the current limits for two years, but this short-term measure would bring some stability to the market.
If the extension isn’t passed, there’s no reason to believe that the private sector is going to step up and provide reasonably priced, long-term, fixed-rate mortgages. The nation has been waiting for banks to start making loans for more than two years now. Without a free market alternative prepared to step up, this is an incredibly risky time for the government to step out of the housing market.
What do you think about the FHA loan limits potentially lapsing while home sales are struggling?
Comments [0]