It’s time to reduce FHA loan limits

chopping blockIt used to be that loan limits would change every year based on prior housing trends. Given that home values in 2012 largely rose, it might be expected that loan limits in 2013 would increase. In fact, the Federal Housing Finance Agency announced that loan limits will remain unchanged next year.

Generally speaking, the most common loan limit continues to be $ 417,000. This is high, however, when you consider that the national median existing home sold for $ 186,100 in the third quarter, according to the National Association of Realtors.

Why are loan limits so high?  Why will they remain unchanged?

“During the recent housing bust, the average U.S. home price declined substantially,” said the FHFA in a recent press release. “While estimates vary, the FHFA monthly and quarterly HPI declined by more than 19 percent through mid 2011. Although FHFA’s monthly and quarterly HPI both evidenced price increases over the latest year, the magnitude of those increases was relatively small–only in the range of 4.0-4.4 percent. Because the latest year’s price increase did not fully offset the cumulative decline in prior years, the national loan limit is left unchanged pursuant to the terms of HERA.”

In other words, they rationalized this to come up with the answer   they wanted.

Home prices are way down

Housing prices reached their peak in April 2007, according to the FHFA. Prices then fell about 19 percent. Yet during the past year, prices have edged up better than 4 percent. In other words, home prices nationwide are still almost 16 percent lower than they were in 2007.

Mortgage loan limits are supposed to reflect home price movements. So, if prices go down then one would expect that loan limits would also fall. This didn’t happen.

Why still the higher limits?

The thinking was that if loan limits were reduced after the mortgage meltdown to where they were “supposed to be,” the ability to get financing in many local markets would be damaged, thus driving home values down even further.

Last year, Congress decided to force the FHA to insure single-family loans for as much as $ 729,750 in high-cost areas. Not everyone thought the measure was necessary.

“Not a single Iowan would benefit from a loan limit extension,” said Rep. Leonard Boswell (R-IA). “These high-dollar loans for a select few of the very wealthy should not be on the shoulders of the American taxpayers.”

Boswell also mentioned that according to FHA data, in calendar year 2010, only about 9,000 FHA loans between $ 625,000 to $ 729,000 were insured.

Time to reduce the FHA loan limits

Given the losses sustained to the FHA’s reserve fund, now would be an appropriate moment to reduce the FHA loan limit.

In my opinion, just make the loan limit twice the national median home price figure. That might be a number acceptable even to Mr. Boswell , and it might also be a number which puts less stress on the FHA insurance system.

HSH Associates Financial News Blog

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