Congress has raised the jumbo limit for Federal Housing Administration (FHA) loans back to $729,750 just one month after the loan limit increase expired in October 2011. The limit on Fannie Mae- and Freddie Mac-backed loans, however, is not set to be increased and will remain at $625,500.

In related news, jumbo loan borrowers pose a greater risk of strategic default than any other type of borrower, according to a recent report from Moody’s Analytics.

In other related news, the FHA will soon require a taxpayer bailout. [For a full report on the anticipated FHA taxpayer bailout, see the November 2011 first tuesday article, Federal Housing Administration bailout just around the corner.]

first tuesday take: An FHA trifecta of impending doom.

Congress must be pretty confident that prices will not drop more than 3.5% over the short term. Given related news, we can’t figure out where this confidence comes from. The FHA is on the brink of a taxpayer bailout, Moody’s has heralded an imminent wave of strategic defaults on jumbo loans and by our account prices have a couple of years yet to fully bottom out. [For our projection of the market’s bottom, see the October 2010 first tuesday article, The equilibrium trend line: the mean-price anchor.]

Congress properly raised the jumbo loan limit in 2008 to provide buoyancy to a rapidly sinking housing market that was in danger of long-term stagnation. Today, we bear witness to the result. Thousands more qualified for jumbo loans at 3.5% down in 2008 and continued watching prices plummet all the way to the present day. Those who had a 96.5% loan-to-value ratio (LTV) in 2008 now enjoy a 125% LTV (if they are lucky) just like their reckless forebears from the Millennium Boom.

In fact, increasing the FHA’s jumbo loan limit signals congressional uncertainty in the housing market. It is another example of a panicky, short-sighted move by a Congress that is beholden to the interests of lenders and the real estate trade union. Should anyone in an unstable market environment such as ours be able to finance a home priced at nearly a million dollars with only 3.5% down?

Haven’t we learned our lesson that this lack of skin in the game is unsustainable and only serves to increase fees for lenders and realtors in the short term, resulting in strategic defaults and foreclosures in the long term? [For information on sustainable lending solutions, see the October 2011 first tuesday article, The 20% solution: personal savings rates and homeownership.]

But the name of the game is appearance. This move will keep up the appearance of stable prices and the appearance of home sales volume, it will keep lenders and realtors happy as they collect fees on jumbo loans, but it will not make a real impact on prices and sales volume for the long term. We see the evidence of this fact in the current predicament that the FHA faces today.

Once again, aided by an ideological government housing policy, the architects of the real estate market continue to extend and pretend.

re: “Jumbo mortgage holders pose highest risk of default” and “Higher FHA loan limits reinstated for high-cost housing markets” from the New York Times