US Lawmakers Move To Restore Higher FHA Loan Limits

--Bill increases maximum size of an FHA-backed mortgage to $729,750

--Some Republicans voted against the increase, saying it contradicts the goal of reducing the U.S. government's role in propping up the housing market

--Obama administration supports eventual goal of reducing the loan limits

(Adds background in last three paragraphs, updates with Senate vote.)


By Alan Zibel
Of DOW JONES NEWSWIRES

WASHINGTON (Dow Jones)--U.S. lawmakers moved Thursday to increase the maximum size of loans that can be guaranteed by the Federal Housing Administration, even as a top Obama administration official expressed doubt about the need for the change.

A spending bill passed by Congress increases to $729,750 the maximum size of a mortgage that can be backed by the FHA, which guarantees loans to buyers with down payments as low as 3.5%. The Senate voted to approve the bill Thursday evening, after the House voted earlier in the day.

Some Republicans in the House and Senate were upset by the move, arguing that it contradicts a goal of both parties to reduce the U.S. government's role in propping up the housing market. "I am just absolutely so discouraged at Congress in lacking the courage to deal with this issue," said Sen. Bob Corker (R., Tenn.).

An earlier version of the legislation in the Senate would have increased loan limits for mortgage finance companies Fannie Mae (FNMA) and Freddie Mac (FMCC) as well, but that was stripped out due to opposition from House Republicans.

The loan limit fell to $625,500 on Oct. 1 in expensive markets like New York, San Francisco and Washington. They declined in around 250 counties for Fannie and Freddie, and around 600 counties saw FHA limits drop. In some cases, the FHA loan limits fell below those of Fannie and Freddie.

Carol Galante, the Obama administration's nominee to lead the FHA, told Senate lawmakers that the administration continues to support reducing the limits.

"We maintain that it is appropriate to take a step back on the loan limits," Galante told Senate lawmakers. However, she noted that because housing markets around the country remain weak, "there are reasonable people who may want to see us continue to stay in the business."

The move by Congress will give borrowers seeking loans between $625,500 and $729,750 in pricey markets two options. They can take out "jumbo" loans that carry higher interest rates than those backed by Fannie and Freddie and require down payments of at least 20%. Or, they can take out an FHA loan, which allows for lower down payments but charges insurance premiums that add to borrowers' costs.

Housing industry lobbyists pushed for Congress to reinstate the higher limits for Fannie, Freddie and FHA, citing concerns that any steps to raise borrowing costs might be too much for fragile housing markets to bear. Another Republican criticism of the action is that it would primarily benefit affluent neighborhoods.

"This means that taxpayers will be subsidizing the purchase of expensive homes by wealthy buyers," said Sen. Richard Shelby (R., Ala.).

However, Sen. Robert Menendez (D., N.J.) said that restoring the loan limits will benefit the housing market at a time when it is weak. Doing so, he said, "won't cost taxpayers a dime" and will benefit the housing market in many other parts of the country besides those cities.

The move by Congress came after an annual independent audit found the FHA's cash reserves are now so depleted that there is close to 50% chance the agency could run out of money and require a taxpayer bailout in the next year.

In the past four years, as private lenders have pulled back from the mortgage market, the FHA's market share has swollen. It backed one third of mortgages used to finance home purchases last year, up from around 5% in 2006. The FHA doesn't make loans but insures lenders against defaults on mortgages that meet its standards.

-By Alan Zibel, Dow Jones Newswires; 202-862-9263; alan.zibel@dowjones.com

More Californians able to afford homes

Lower prices and interest rates lead to a third-quarter increase in those who can afford a home at the statewide median to 52%, up from 51% in the previous quarter, according to a Realtor group's index.

By Alejandro Lazo, Los Angeles Times
November 11, 2011
It's the silver lining of falling home prices: With low interest rates and cheaper housing, the percentage of Californians who could afford to buy a home increased in the third quarter, a real estate group said.

The portion of households that could afford a home priced at the statewide median of $292,120 rose to 52%, up from 51% in the previous quarter, according to an index released Thursday by the California Assn. of Realtors.

Beth L. Peerce, president of the group, said that one problem potential home buyers could face is tight credit. Many first-time buyers don't qualify for a loan, she said.

Some analysts have noted that banks have tightened their loan criteria since the housing crash. But it was those loose lending standards that caused the real estate bubble in the first place, so many other analysts argue that more carefully scrutinizing borrowers is appropriate.

The federal government has been providing enormous support to the mortgage market through loans backed by the Federal Housing Administration, although it has recently taken steps to scale back that support.

In California, potential buyers needed to earn at least $61,530 a year per household to afford a home at the third quarter's median price, the Realtors group said. The median is the point at which half the homes in the state sold for more and half sold for less.

The real estate group calculated the monthly payment for a mortgage on such a home to be $1,540, including taxes and insurance, and assuming a 20% down payment and a 4.63% interest rate.

alejandro.lazo@latimes.com