Federal loan guarantees set to shrink

A temporary boost to Federal Housing Administration-guaranteed loan limits passed in 2008 is set to expire Oct. 1 unless Congress acts to extend it.

Homebuilders and real-estate agents in metro Phoenix and elsewhere have been urging federal lawmakers to extend the higher FHA mortgage limits for two more years, arguing that to lower them now would have a further chilling effect on the housing market.

But critics of the inflated FHA limits, implemented as part of the Economic Stimulus Act of 2008, said reducing them to 2008 levels would hurt only a tiny sliver of the housing market and actually would leave the limits higher than they should be.

In February, officials from the U.S. Treasury Department and the U.S. Department of Housing and Urban Development, of which the FHA is a part, advised congressional leaders to let the higher limits expire.

Since then, two separate bills have been introduced in Congress that would extend the higher limits for two more years, but as of Monday they didn't appear to have much political momentum.

Since the major mortgage lenders began phasing out subprime loans in 2007, the market share for FHA-guaranteed loans has skyrocketed from about 4 percent of all loans to more than 15 percent, according to HUD data.

In Maricopa County, the temporary FHA limit currently in effect is $346,250. If Congress does not act to extend it, the FHA limit would drop to $271,050 on Oct. 1, a difference of $75,200.

The decrease would be even more significant in the Flagstaff and Prescott areas, according to FHA documents.

The FHA loan limit in Coconino County, where Flagstaff is located, would drop from the current limit of $450,000 to $333,500, a difference of $116,500.

The FHA loan limit in Yavapai County, where Prescott is located, would drop from the current limit of $390,000 to $271,050, a difference of $118,950.

FHA loan limits are based on median home prices in each county, but they can't fall below the federally mandated minimum of $271,050. That bottom limit would not change even if the 2008 legislation were allowed to expire.

As of August, the median price for a detached, single-family home in Maricopa County was $120,000, according to an Arizona State University report.

FHA-backed loans act like an insurance policy against borrower default.

Borrowers with FHA loans are required to pay a down payment of only 3.5 percent, compared with a 5 percent minimum for most non-FHA loans.

Borrowers with FHA-backed loans usually get a very low interest rate, as long as the loan amount is low enough to qualify for purchase by Fannie Mae and Freddie Mac.

Those two government-sponsored enterprises, currently under U.S. conservatorship, bundle loans they buy into mortgage-backed securities and sell them to investors.

Some analysts said that because the median home price is so much lower than it was in 2008, the FHA has been artificially propping up the market with its government guarantee of repayment on loans as large as $729,750 in some high-priced markets.

They argued that such a high ceiling places undue risk on taxpayers, who essentially foot the bill when a borrower defaults on an FHA loan.

Tony Yezer, a professor of economics at George Washington University in Washington, D.C., said a recent study by the university shows the decrease in loan limits would not affect most borrowers, and that extending them would put the FHA at greater risk of becoming insolvent.

"If you are putting 3.5 percent down on a $300,000 house, maybe you need to buy a little less house," Yezer said.

by J. Craig Anderson The Arizona Republic Sept. 19, 2011 05:04 PM




Federal loan guarantees set to shrink