After a year characterized by grumpy partisan gridlock, Congress came up with a Thanksgiving compromise that could change the mortgage choices of buyers and refinancers in more than 660 markets across the country: It raised maximum loan limits for the Federal Housing Administration while leaving loan ceilings untouched for Fannie Mae and Freddie Mac.
In effect, this may make FHA the go-to financing option for borrowers needing loans up to $729,750 — with down payments as low as 3.5 percent — in New York, New Jersey, high-cost areas of California, metropolitan Washington, D.C., and scattered counties in other states, including Massachusetts, Florida and North Carolina. Fannie Mae- and Freddie Mac-eligible loans in those areas, meanwhile, stay capped at $625,500.
Equally important, the new plan raises the FHA ceilings for purchasers in hundreds of more moderately priced markets. In Hartford, Conn., the limit for FHA is now $440,000 — up from $320,850; Fannie and Freddie remain capped at $417,000. Seattle-area buyers’ maximum FHA loan amount jumped to $567,500, while the Fannie Mae-Freddie Mac ceiling remains at $506,000.
Buyers with low down payments in Portland, Ore., who previously had been limited to FHA mortgages of $362,250, can borrow up to $418,750 under the new plan, $1,500 more than they can get from Fannie and Freddie, which generally require steeper down payments and higher credit scores.
The new loan ceilings in hundreds of markets are at the core of the compromise: They raise the maximum FHA loan amount in all areas of the country to 125 percent of the local median home-sale price, while leaving Fannie Mae’s and Freddie Mac’s limit at 115 percent of the median.
What motivated Congress to create separate and unequal rules that transform FHA — traditionally a haven for moderate-income, first-time buyers with minimal cash — into a key source of financing for buyers in upper- as well as mid-bracket markets?
Nobody in Congress actually proposed this idea at the start. By a 60-38 vote in October, the Senate passed an amendment raising all three agencies’ limits to $729,750 in high-cost areas and 125 percent of the median sale price elsewhere. The goal — lobbied aggressively by realty and homebuilding groups — was to inject a needed oomph into lagging home sales. But Republicans in the House balked at doing anything that might prolong the existence of Fannie and Freddie, both the targets of scathing criticism for their multibillion-dollar costs to taxpayers and big bonuses for top executives.
What ultimately emerged from the legislative scrum was the current compromise penalizing Fannie and Freddie, while boosting FHA. House Republicans weren’t enthusiastic about helping FHA, either — the agency faces its own financial challenges — but unlike Fannie and Freddie, FHA is subject to congressional appropriations and closer oversight. Republican critics held their noses and voted for the plan.
What will this mean for buyers from now through the end of 2013, when the compromise expires? “There’s no doubt this will drive more business to FHA,” said David Stevens, former FHA commissioner and current president and CEO of the Mortgage Bankers Association. Annie Austin, a loan officer with Cobalt Mortgage in Bellevue, Wash., said: “With [Fannie and Freddie] limited to $506,000 [locally], FHA is going to become the darling of the industry again” at $567,500. Bob Walters, chief economist of Quicken Loans, one of the largest national lenders, said “the increased loan limits will benefit many consumers — especially those looking to borrow larger amounts but [who] are in a credit situation where Fannie Mae and Freddie Mac loans are not available or optimal.”
The switch to FHA could entail some pain, however. Tim Kepler, a loan officer with Land Home Financial in Danville, Calif., noted that the agency raised its upfront mortgage insurance premiums from 0.5 percent of the loan amount to 1.15 percent earlier this year. This “will increase [applicants’] closing costs over a [Fannie or Freddie] loan.” The premium can be financed, but can add substantially to the costs of high-balance mortgages — more than $500 a month on a $700,000 loan, according to Brian Chappelle, head of Washington, D.C., consulting firm Potomac Partners. Bruce Calabrese, president of Equitable Mortgage in Columbus, Ohio, says the hefty new premiums make “FHA too restrictive and unattractive” for most refinancers in his area, even with slightly higher loan ceilings.
Bottom line for shoppers: Take a hard, close look at FHA with a local loan officer, in light of the rule changes. Pencil out the costs, down-payment requirements, and more generous standards on credit. FHA may be the best option. But then again, the higher fees just might change your mind.