Loan Modification

What about proportional FHA loan limits?

By Peter G. Miller

The House of Representatives is busily chewing away at the FHA program, but largely missing what needs to be done.

First, of course, there has been the passage of H.R.830, the FHA Refinance Program Termination Act. With a vote of 256 to 171 the House has moved to dump the FHA short refi program. Since this program has resulted in just 44 FHA loans it’s not a big deal and is likely to pass in the Senate.

Second, in the kick-people-while-they’re-down-department, the House also passed H.R.836, the Emergency Mortgage Relief Program Termination Act with a vote of 242 to 177. This legislation denies emergency mortgage assistance to individuals who have lost their jobs. The result, of course, will be more foreclosures and thus additional pressure to reduce local home values. Passage in the Senate is uncertain.

This legislative work curiously goes after one federal program that doesn’t matter and a second program which is a reasonable necessity at a time when the housing market remains hugely depressed. Such activity reminds one of George Santayana, who said “fanaticism” is when you redouble your efforts and forget your purpose.

The oddity here, one of them anyway, is that the House could actually have done something useful. Here’s how:

Risk

If we are to be worried about FHA mortgage risk then it follows that we should make such loans less risky. The fastest and easiest way to do this would be to lower FHA loan limits to the level that last enjoyed in 2008, before Congress raised the rates to today’s levels.

Today in a “high cost” area you can get an FHA mortgage for as much as $729,750. If you live in Alaska, Hawaii, Guam or the Virgin Islands then under FHA guidelines you can actually get insured financing for as much as $1,094,625.

The President has proposed that we lower limits and you might think that such a proposal would have bi-partisan support.

87 Percent

And so, a modest proposal.

The President wants to reduce conventional loan limits and there is an effort underway to artificially push aside the FHA so that private sector lenders can gain unearned market share.

Why not go back to the old system under which the FHA loan guidelines were very simply set at 87 percent of the conventional limit.

Thus, for example, if the 2011 conventional loan limit for a single family home is set at $417,000 then the FHA loan limit for the same area would be $352,790.

This arrangement would allow plenty of financing for entry-level FHA borrowers while allowing private sector lenders a competition-free zone at the higher end of the conventional market.

In other words, instead of raising the FHA premium by .25 percent as is now being done, the traditional aim of the FHA program to serve low and middle-income borrowers could be maintained without additional cost to the borrower while lenders could get the greater market share they want.

Full post as published by FHA Mortgage Guide on March 16, 2011 (boomark / email).