Congress has opened the door for FHA lenders to originate jumbo loans of up to $729,750 without being crowded out of the market by Fannie Mae and Freddie Mac products.
In a compromise worked out between House and Senate conferees and passed by Congress, the loan limit for Fannie and Freddie single-family mortgages will be capped at $625,500.
It appears the conferees wanted to trim the GSEs' market share and give private jumbo lenders more space to operate.
Meanwhile, FHA will provide a backstop if the private market can't fill Fannie and Freddie's shoes.
Total Mortgage Services president John Walsh said private jumbo lenders can fill the space vacated by the GSEs but he's concerned the market for those higher-balance loans won't be as robust and mortgage rates won't be as competitive without the GSEs.
That's why it is a “very good thing” that FHA will continue to guarantee loans up to $729,750, Walsh said. No private lender is going to offer a jumbo product with a minimum 3.5% downpayment, he added.
Potomac Partners founder Brian Chappelle doesn't expect FHA will generate much business in the $625,500 to $729,750 range.
Today, the GSEs mostly cater to borrowers with high credit scores who cannot make a 20% downpayment (and avoid private mortgage insurance), the FHA expert said. It's unlikely FHA will get that business because of the annual 1.15% premium it charges borrowers for government MI.
On a $700,000 loan, an FHA borrower would pay at least $500 a month, or $6,000 a year in annual premiums. “Who would pay that unless they had no other options,” asked Chappelle.
After the maximum GSE and FHA loan limits dropped down to $625,500 on Oct. 1, FHA acting commissioner Carol Galante didn't encourage Congress to raise it again. But a few days later policymakers hiked the FHA cap to $729,750, while leaving the GSEs at the lower number.
“It has never happened before,” she told reporters. “It is very hard for us to make a prediction of how much of that business will end up coming to FHA verses the other private alternatives,” she said.
Still, she suspects the loans will be good credits and “good business” for FHA.
In the 11 months ending in September, FHA endorsed nearly 7,000 higher-balance loans and only 17 are seriously delinquent (90 days or more due).
Besides raising the ceiling cap, Congress agreed to restore the FHA loan limit in hundreds of counties by raising the local benchmark to 125% of the median house price from 115%. The benchmark dropped down to 115% at the end of September.
Walsh said the change was a “healthy and necessary” move on the part of Congress. He doesn't want to see the government withdraw any of its support for the mortgage market at this point in time.
“I don't think we are ready for it,” he said. “The housing market is still on life support and still very fragile.”
Meanwhile, there are concerns that FHA may charge a higher premium for loans above $625,500 and hike the downpayment requirement.
“Some people are speculating they may do one of those two things,” Chappelle said. “That would be a real deterrent to any new business.”
He pointed out that several audits of FHA's portfolio show that higher-balance loans perform better than lower-balance loans.
“These higher-balance loans will increase revenue for the FHA insurance fund and reduce taxpayer risk,” the FHA consultant said.
