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 the FHA the go-to financing option for borrowers needing loans up to $729,750 – with down payments as low as 3.5 percent – in high-cost areas of California, metropolitan Washington, D.C., New York, New Jersey 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. Seattle-area buyers’ maximum FHA loan amount jumped to $567,500, while the Fannie Mae-Freddie Mac ceiling remains at $506,000. In Hartford, Conn., the limit for FHA is now $440,000 – up from $320,850; Fannie and Freddie remain capped at $417,000.
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 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 dollar costs to taxpayers and big bonuses for top executives.