A legislative proposal to eliminate the $271,050 loan limit “floor” on Federal Housing Administration-insured loans ran into strong opposition at a congressional hearing Wednesday.
The housing industry is already bracing for Congress to reduce the maximum loan limit on October 1 from $729,750 in high cost areas to $625,000, according to Mortgage Bankers Association chairman Michael Berman. "It would also be a mistake to lower the limits in low cost areas where FHA does most of its business," Berman told members of the House Financial Services subcommittee on housing.
He noted the average new FHA loan is about $190,000. "Eliminating the floor, would drastically deny access to credit for many otherwise qualified lower and middle class borrowers," Berman said. (Currently, FHA will insure single-family loans anywhere in the nation on loan balances of up to $271,050. This is considered a “floor” but in high cost areas the agency will insure mortgages of up to $729,750.)
The FHA reform proposal would lower the FHA loan limit floor to 125% of the median home price in each county. The median house price in the U.S. is now $173,000.
Home prices have fallen across the nation for the past few years and the FHA floor is at least 60% higher than the national median existing price, according to Federal Financial Analytics managing partner Basil Petrou. At this level, the loan limit floor is permitting FHA to finance "borrowers with the highest incomes in local areas and driving out private capital," Petrou testified.
Subcommittee chairman Judy Biggert, R-Ill., said the FHA reform bill is designed to roll back the government share of the mortgage market, allowing private mortgage lending to emerge. However, Rep. Biggert noted that the measure is still a discussion draft and is open to change.
"The last thing we want to do is stop the recovery of the housing market," she said. "I look forward to working with my colleagues to facilitate the private sector re-entry, reduce taxpayer risk and promote a vibrant housing finance system."
Rep. Gary Miller, R-Calif., warned that reducing loan limits will create "more instability" in the housing market. "I am glad this is only a discussion draft. We need to be very cautious in what we are doing," the California congressman said.
Reps. Miller and Brad Sherman, D-Calif., have introduced a bill to make the $729,750 loan limit in high cost areas permanent.
Potomac Partners founder Brian Chappelle said he opposes a reduction in the FHA floor "since it would jeopardize FHA's financial strength." He noted that higher-balance FHA loans perform better than lower balance loans, which allows lower risk borrowers to subsidize riskier borrowers.
"This principle of cross subsidization also minimizes overlap with the private sector by overcharging borrowers with lower risk characteristics," the mortgage banking consultant said.
