FHA reduces loan limits; NASA confirms sky still aloft*

It’s 2014, and the Federal Housing Administration (FHA) has lowered loan limits on the residential mortgages it guarantees, effective through the end of the year.

These changes reverse the higher loan limits set under 2008’s Economic Stimulus Act (ESA). The higher limits were originally slated to sunset with the ESA in 2009. Congress extended the higher loan limits again and again in a six-year effort to juice recovery out of a sluggish housing market.

Now that home prices have rebounded (albeit temporarily), the FHA is stepping aside to let an invigorated private mortgage insurance market pick up the slack. But industry analysts have raised the alarm that the market’s not ready. In particular, they fear a drop in activity in the high-priced markets affected by the lowered loan limits.

Let’s take a look at this. The “national floor” limit — the minimum mortgage amount the FHA is able to insure in relatively low-cost areas (that is, most counties in the non-metro U.S.) — remains the same at $271,050. That figure stays in place for areas where 115% of the median home price is 65% or less than the Federal Housing Finance Agency’s (FHFA) national conforming limit of $417,000.

In the pricier markets everywhere else, the nationwide maximum “ceiling” limit for a single family residence has been reduced from $729,750 to $625,500. For areas where prices fall somewhere between the floor and ceiling, the new loan limits have been reduced formulaically.

The mathematics behind the reductions are a little complicated. In short, the maximum size of an FHA-insured loan in most major metropolitan statistical areas (MSAs) will come down significantly. Here’s a sampling of changes in California:

County	MSA	Old limit	New limit	Percent Change
Alameda	San Francisco	$729,750	$625,500	-14%
Contra Costa	San Francisco	$729,750	$625,500	-14%
Los Angeles	Los Angeles	$729,750	$625,500	-14%
Marin	San Francisco	$729,750	$625,500	-14%
Orange	Los Angeles	$729,750	$625,500	-14%
Riverside	Riverside	$500,000	$355,350	-29%
San Benito	San Jose	$729,750	$625,500	-14%
San Bernardino	Riverside	$500,000	$355,350	-29%
San Diego	San Diego	$697,500	$546,250	-22%
San Francisco	San Francisco	$729,750	$625,500	-14%
San Mateo	San Francisco	$729,750	$625,500	-14%
Santa Clara	San Jose	$729,750	$625,500	-14%
Ventura	Ventura	$729,750	$598,000	-18%

In certain places where pricing varies widely across geography, the effects of the reduced FHA limits are uneven. In the Inland Empire, for instance, low-tier prices in cities like Chino Hills cut quite close to the new cap. In San Bernardino, on the other hand, low-tier prices in are well below the newly reduced limits. That has the potential to suppress purchasing power — and thus pricing — in more expensive pockets, as sellers of property priced close to the cutoff make concessions to ensure their buyer qualifies for a low down payment FHA-insured loan.

Related articles:

California tiered home pricing

Department of Housing and Urban Development, HUD Mortgagee Letter 13-43, Attachment I and II

first tuesday insight

The FHA’s ceiling came down; the sky, not so much.

Scenarios offered by critics of the reductions go something like this: without higher FHA loan limits, buyers in pricy markets are forced to turn to conventional financing for homes priced over the FHA loan limits. They fail to qualify, sales volume plummets, the recovery seizes, slides backward and disaster ensues. Right?

Related article:

Bloomberg News, “Regulators Weigh Reduction in Size of U.S.-Guaranteed Mortgages”

Wrong. First, prices are already on the downswing, having leveled off from 2013’s speculator bonanza. But so is buyer purchasing power, thanks to rising interest rates, sluggish job growth and stagnant wages. The reduced limits are already significantly higher than low- and mid-tier price indices in a number of California’s major markets, and that gap is only widening as our mini-bubble deflates.

Related articles:

Consensus reached: California home prices are unsustainable

Second, FHA-insured loans mainly target low- and mid-tier buyers, who drive home sales volume and make up most new households. Lower FHA loan limits hardly affect them at all. And the FHA’s share of California mortgage guarantees is already shrinking, as private insurance becomes cheaper than the FHA’s mortgage insurance premiums. In December, just 19.6% of all new loans were guaranteed by the FHA, according to Dataquick.

Related article:

FHA, PMI or neither?

To be sure, lower FHA loan limits are to have some effect on the market, but the scope of that impact is limited. But guaranteeing fewer gigantic mortgages reduces the FHA’s default risk exposure, allowing them to keep financing affordable for the low-tier buyers who comprise the bulk of California’s home sales. Low down payment, government-backed home loans were never designed to help well-off buyers into luxury homes.

Rather, FHA loans give potential first-time buyers a leg up toward the social mobility enabled by homeownership. If loan limit reductions mean FHA guarantees (and their attendant low down payments) are no longer available to jumbo loan users, we say that correction is overdue.

Related article:

“Back to Work” with the FHA

More significant changes await the market, however, when the Federal Housing Finance Agency (FHFA) gets around to further reducing Fannie and Freddie’s conventional loan threshold. It announced it was mulling over those plans back in fall 2013. We’re watching those developments for you.

*Disclaimer:  We didn’t really check with NASA on the sky bit…but we bet they’d agree with us.

Re: “HUD Announces New FHA Loan Limits to Take Effect January 1st”, Department of Housing and Urban Development Press Release 13-184