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
moderate-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
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
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 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 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 costs to taxpayers and big bonuses for top
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
“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”
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.
Ken Harney is a syndicated real estate columnist.