In less than a week, the home buying power of millions of Americans will be crippled by an average of $68,000. Some markets will experience declines as high as $250,000. That is, unless Congress intervenes before Oct. 1 when the limits for loans backed by the Federal Housing Administration (FHA) are set to shrivel to pre-crash levels.
But it's not just buyers in the nation's priciest markets, where FHA loan limits currently hover at $729,750, who'll feel the heat of shrinking mortgage caps. Depending on regional restrictions, anyone hoping to purchase or refinance a home between $271,500 and $729,000 may find themselves ineligible for financing, or paying much more for their loan.
Understanding the issue of loan limit contraction requires a basic knowledge of FHA mortgages. They were originated to extend the opportunity of home ownership to creditworthy Americans who may not qualify for a traditional bank loan due either to a lack of cash or less-than-perfect credit scores. The FHA program makes mortgages available to buyers with down payments of as little as 3.5% when paired with a good credit score. Some borrowers with lower credit scores are required to put down 10%. In return, the borrower pays a premium to FHA which generates revenue for the government.
Following the 2008 financial crisis, FHA's loan limits were increased to help stabilize the economy and compensate for stingy and cautious lenders who were unwilling to offer mortgages. But the recovery-based limits are slated to end this month and despite the shaky state of the U.S. housing market, Congress has yet to pass an extension for the program's current caps.
Proponents of the decrease rightfully believe that dialing down the dollars offered through the program will result in fewer FHA mortgages and therefore a diminished government role in the nation's housing and finance sectors.
On the flip side are groups like the NATIONAL ASSOCIATION OF REALTORS® (NAR) and National Association of Home Builders (NAHB), who fear the nation's housing market will be held hostage by Wall Street's terms and interest rates should an FHA loan limit extension fail to pass. Supporters of an extension point out that the FHA mortgage insurance program is self-sustaining -- it's never required direct funding from Congress and therefore comes with no cost to the taxpayer.
While a debate about the federal government's place in predominantly private sectors like housing could rage on forever, one undeniable truth remains: America's real estate market is still a long way from recovery. With that in mind, it seems only logical to question why Congress would allow 669 counties in 42 states to absorb an unnecessary blow from new lending impediments. The outcome of the looming loan limit shift could be detrimental to the housing market and America's economic recovery. According to NAHB estimates, under new loan caps, 59% of all owner-occupied housing will be ineligible for affordable FHA financing.
Limiting home loans for qualified buyers will cause property values to topple and further damage the fragile U.S. real estate market. Regardless of your stance on FHA's practice of insuring mortgages, it should be apparent that now isn't the time to further handicap housing. It's bad for home owners, buyers, and sellers. And it's bad for America.