Loan Modification

FHA Loan Limits Extended For 1 Year ? But Why?

By Peter G. Miller

Current FHA loan limits have been extended until September 30, 2011 with the passage and signing of H.R. 3081.

“Strengthening our nation?s housing market is essential to the American economic recovery,” says House Speaker Nancy Pelosi (D-CA).  To ensure that the housing market continues to recover from the effects of the subprime debacle and the ensuing economic downturn, Congress has taken swift action in the Continuing Resolution to extend single family loan limits for the Federal Housing Administration and Fannie Mae and Freddie Mac through the end of fiscal year 2011.

?An expiration in the higher loan limits could have done great harm to our fragile economy nationwide. Instead, we have helped keep the mortgage market functioning and ensured that home mortgages are available and affordable for consumers.”

Ah well, that’s debatable.

Easy Way Out

The idea of reducing FHA loan limits is surely not popular. What might be called the “Leave-It-Alone Extension Act of 2010″ sailed through Congress with votes 318 to 106 in the House and 69 to 30 in the Senate. These were lop-sided, bipartisan votes for legislation that was then quickly signed by the President.

However, had anyone thought this through they might have had a different bill.

Last month I raised the question, Is It Time To Reduce FHA Loan Limits?

Well, sure it is. The current loan limits were really intended to be a temporary fix to get us through the near-Depression of 2008. While the economy remains woeful, we are at least not teetering on the edge of national financial failure, an improvement of sorts if not the holy grail of economic growth.

In response to my argument for lower FHA loan limits, Bill Cobb, an appraiser in the Greater Baton Rouge area, wrote and said:

“As an FHA Home Appraiser since 1996,” said Cobb, “I wholeheartedly agree with your post. In the ?old days?, FHA was for the first-time homebuyer. Now, it?s freakin insane. I receive FHA appraisal orders in the $400?s for homes in gated communities and I?m thinking to myself, what in the hell is FHA doing guaranteeing home loans in this price bracket? Why is FHA still taking that risk in 2010? I Agree with you?it?s past time for FHA to remove itself from high end homes lending.”

There are two reasons the FHA loan limit is remaining in place.

First, it’s easier in terms of the political process. Reducing the FHA loan limits would set off a big fight in Washington — just look at the votes in each house of Congress.

Second — and keep your eyes on this one — owners with existing loans may be able to refinance into an FHA loan, perhaps trading a toxic mortgage for the security and sanity of FHA financing. If the FHA loan limit were lowered many borrowers who bought high and now have less equity would not have such an opportunity. That could be very damaging to the marketplace and thus all homeowners.

Next year, perhaps, we can seriously grapple with the need to reduce FHA loan limits, return the program to its intended purpose and lower government risk.

Full post as published by FHA Mortgage Guide on October 04, 2010 (boomark / email).