Vacaville, Calif., is a middle-class outpost on the outskirts of pricey San Francisco and nearby East Bay communities like Walnut Creek. In some parts of the city, homes sell for about $300,000, says local practitioner Jeannette Way, CRS, of Gateway Realty. The vast majority of buyers—up to 90 percent, Way estimates—rely on financing backed by the Federal Housing Administration because the conventional lending market simply isn’t there.But now even FHA lending is at risk because of a proposal floating in the U.S. House of Representatives to change the formula with which loan limits are calculated. It would reset the maximum loan values and could remove the “floor” that keeps FHA limits from dropping to unrealistically low levels—in the case of Vacaville, limits could fall to about $170,000.
“You might as well just wipe the industry away,” says Way, CRS, who also serves as 2011 chair of the NATIONAL ASSOCIATION OF REALTORS®’ Federal Housing Policy Committee. “It just won’t be there anymore.”
Lawmakers are deep into talks about changing limits not just for FHA loans but also for Fannie Mae and Freddie Mac’s conventional conforming loans. Talks are happening now because the current limits expire on Sept. 30, the end of the federal fiscal year.
NAR estimates that reverting to the lower FHA limits on Oct. 1 will impact 612 counties in 40 states and the District of Columbia, with an average loan limit reduction of more than $50,000.
Concern in Moderate Markets, Too
In Plymouth, Mich., not far from Detroit, the area would take a hit similar to what’s expected in Vacaville. “The housing market here would come to a standstill and I’d have to find a new job,” says Claire Williams, ABR, GRI, a practitioner with Remerica Hometown One and 2011 vice chair of the Federal Housing Policy Committee.
In parts of Wayne County, homes cost around $200,000, Williams says. But if the proposal circulating in the House becomes law, the maximum FHA loan amount throughout the county, which includes Detroit, would drop to less than $66,000.
NAR President Ron Phipps has made clear that Realtors® would fight such a drastic drop. “Our housing recovery remains fragile at best,” he said in testimony before the House Financial Services housing subcommittee in May. “Changing the loan limits at this critical time will only restrain liquidity and hamper the recovery.”
Since 2008, the floor has been $271,050 for FHA loans and $417,000 for the government-sponsored enterprises Fannie and Freddie. For expensive areas like San Francisco, loans can go up to $729,750 under the FHA and the GSEs.
It’s the FHA floor of $271,050 that would go away under the House proposal. Loans would be limited to 125 percent of the area median home price, so if the median home price is $175,000, the highest loan the FHA would guarantee would be $218,750. But it gets more complicated than that, because the floor would be calculated based on county rather than metropolitan statistical area.
“Counties across the country would see their loan limits reduced by tens of thousands of dollars,” says Barry Rutenberg, a home builder from Gainesville, Fla., who testified at the same House housing subcommittee hearing as President Phipps.
A Push to Keep Limits As Is
NAR has been fighting for months to retain the existing $417,000 loan limit for Fannie and Freddie loans and the $271,050 limit for FHA loans, along with the higher limits for expensive areas. These limits were enacted two years ago, and were critical in helping to stem the home sales crisis, lawmakers have said. NAR and other groups have rallied around bipartisan legislation written by Reps. Brad Sherman (R-Calif.) and Gary Miller (D-Calif.) to make these limits permanent.
Despite bipartisan support for maintaining stable loan limits, keeping limits where they are will be an uphill battle because of the country’s pressing budget concerns, NAR analysts say. To allay those concerns, industry analysts and academics have made clear that higher limits by themselves don’t cost the government more money than lower limits. In fact, higher loan sizes have actually helped the FHA insurance fund because on a historical basis they’ve performed better than lower-balance loans, according to an internal 2009 FHA audit.
The Cost of Non-Action
If lawmakers fail to act on the Sherman-Miller legislation, and if they don’t pass the House proposal to lower the limits and remove the FHA floor, loan limits for both the FHA and the GSEs would revert to levels that were set in emergency legislation enacted during the financial crisis.
Under those levels, FHA and GSE limits would drop from 125 percent to 115 percent of the area median home price, although limits couldn’t go below the current floors: $417,000 for Fannie- or Freddie-backed loans and $271,050 for the FHA-backed loans. Limits in expensive areas would drop to $625,500 for the FHA and Fannie and Freddie alike.
That’s clearly far better than the House proposal, but NAR will continue to urge lawmakers to support the Sherman-Miller bill. “If Congress does nothing and loan limits revert to the levels in the emergency bill, that’s a far better outcome than other scenarios, including if the FHA floor is removed,” says Way, “especially given the pressure Congress is under to address the federal deficit. But it will still hurt. At least 40 states will see their limits drop, and thousands of households won’t be able to buy. We have to keep fighting to keep loan limits where they are.”
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