Loan Modification

Is It Time To Reduce FHA Loan Limits?

By Peter G. Miller

How should we modernize the FHA? Do we need to? The Mortgage Bankers Association says yes on both counts and argues that FHA loan limits should be reduced once the housing market returns to normal.

The significance of FHA, says the association, has been underscored with the recent mortgage crisis that began in late 2006 and resulted in the retreat of the private sector and an illiquid mortgage market. FHA?s counter-cyclical role has proven invaluable to maintaining liquidity in the mortgage market and has helped buttress the country?s unstable housing finance system.”

This is important stuff because it acknowledges the important roll played by the FHA program during the mortgage meltdown. While some commentators have been calling for an end to the FHA, the MBA at least acknowledges the necessity and value of the program.

At the same time, the MBA makes this point:

“A wake-up call for FHA and the lending community occurred in September 2009, however, when the U.S. Department of Housing and Urban Development (HUD) announced that the capital reserve ratio for the Mutual Mortgage Insurance (MMI) Fund ? the largest of FHA?s four insurance funds ? had dropped to 0.53 percent of the Fund amount, well below the requirement of two percent from the 1990 Cranston-Gonzalez National Affordable Housing Act. While not a reason to panic, the Fund?s reduction publically signaled to FHA and the mortgage industry that changes must be made. With the withdrawal of the private sector, FHA?s market share has continued to increase and is close to 30 percent of all loan originations and has reached as high as 50 percent of purchase mortgage applications in parts of the country.” (Emphasis mine.)

FHA Loan Limits

What would the MBA change? One idea is to reduce FHA loan limits once real estate markets begin to return.

The “MBA supports a decrease in FHA?s loan limit after the stabilization of the housing market and a return of private financing.”

In addition, says the Association, “a mechanism should be developed so that loan limits bear reasonable relationship to median home prices to encourage both government and private lending.”

I’m unclear why an association which champions private enterprise feels the government should do anything to encourage private lending. That surely sounds like a job for, well, private lenders.

As to lower loan limits, the FHA program is really designed and intended for entry level borrowers and those who want to refinance. However, you can now get an FHA loan for as much as $729,750 in high-cost areas. As the MBA points out, “homebuyers who are able to qualify for loans at the upper loan limit in high-cost areas need to have an income of approximately $183,000, assuming a 4.5 percent interest rate.”

Given that we now have 43.6 million people who live in poverty, it makes sense for the FHA to concentrate on its traditional role once markets return to normal, especially now that we have new mortgage rules to protect borrowers under the just-passed Wall Street reform legislation.

Full post as published by FHA Mortgage Guide on September 20, 2010 (boomark / email).