Colorado's San Miguel County is known as a winter playground with world-class skiing and mountain vistas, a place where homes can sell for millions of dollars.
If you'd like to buy, the Federal Housing Administration -- the agency created to aid low-income and first-time homebuyers - - can help. Not far from the ski resorts of Telluride, an FHA- approved borrower can pick up a five-bedroom, four-bath house with stainless steel appliances and a two-car garage for about $600,000.
The agency, created during the Great Depression, has found itself insuring high-dollar loans in hundreds of counties across the country, from New Jersey to Florida to Arizona. Such loans are drawing renewed scrutiny as lawmakers debate whether to expand FHA lending to even wealthier borrowers.
“It's not the intent of the FHA to facilitate people buying McMansions,” said Representative Scott Garrett, a New Jersey Republican opposed to higher loan limits. “The intent is to help the average American buy the average house.”
Congress is weighing a proposal to restore higher loan limits that expired on Oct. 1. The measure, already adopted by the Senate, would allow the FHA and government-controlled Fannie Mae and Freddie Mac to insure single-family mortgages for as much as $729,750, up from the current $625,500, in high-cost parts of the country.
Lawmakers who back the higher limits are concerned that any withdrawal of federal support could undermine the frail housing market. They are taking their case to House and Senate appropriators, who are meeting in private this week to hash out details of a $182 billion spending bill that includes the mortgage provision.
“We had hundreds of counties across 42 states that found themselves with lower loan limits,” said Senator Robert Menendez, a New Jersey Democrat who co-sponsored the amendment adopted in the Senate. “When you see Realtors, homebuilders and mortgage bankers all come together and say this is one of the most important things to do, it's significant.”
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Those groups have mounted an intense lobbying campaign in the past two weeks, boosted by discouraging housing indicators. Home prices fell 4.1 percent in September from a year earlier, according to data provider CoreLogic LLP, based in Santa Ana, California. The coalition includes the National Association of Realtors, the National League of Cities and the Mortgage Bankers Association headed by former FHA Commissioner David Stevens.
“We urge you to do no harm,” the coalition wrote in a Nov. 3 letter to lawmakers. “Do not precipitate more turmoil in local markets.”
Pushing back are mortgage insurers, the American Bankers Association and others who say it's time for the government to step away from the mortgage business. Joining them is the National Community Reinvestment Coalition, housing advocates who fret that the FHA's mission is being compromised at the expense of working-class Americans.
NCRC President John Taylor pointed to a Congressional Budget Office study that found that higher limits would benefit only the wealthiest 5 percent of U.S. households.
“I don't see that they're gaining anything from this other than reducing opportunity for working-class, blue-collar people,” Taylor said.
The proposal on the table would also raise the cost of high-value Fannie Mae and Freddie Mac loans, pushing even more borrowers to the less-expensive FHA program, Taylor said.
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The loan limit debate has its origins in the 2008 credit crunch, when failing subprime loans led to millions of foreclosures and drove down home prices nationwide. As banks grew reluctant to lend, lawmakers sought to inject capital into the system by increasing the value of mortgages that the FHA, Fannie Mae and Freddie Mac could guarantee. Combined, the three currently back more than 90 percent of home mortgages.
Larger loans that don't have government backing are known as jumbo or non-conforming mortgages. They can be difficult to get, tend to carry higher interest rates and sometimes require higher downpayments than conforming loans.
The National Association of Homebuilders has estimated that 5.3 million homes were caught in the Oct. 1 shift. Nearly 670 counties saw their conforming loan limits decline, according to the NAR.
“We have a convoluted policy in America where the most financially qualified individuals are being forced to pay higher rates because they're outside the loan limits,” said Lawrence Yun, NAR's chief economist.
He noted that FHA loan guarantees are financed with premiums the agency charges to borrowers. Although the agency's capital reserves are at a historic low, it hasn't required a government bailout, unlike Fannie Mae and Freddie Mac, which have drawn about $175 billion from the Treasury Department since they were taken under conservatorship in 2008.
“We understand the ideological fight. But right now we need to look at the practical situation,” Yun said. “The practical reality is we need to get housing to recover.”
Complicating the debate is a law that prohibits the FHA itself from lowering limits. Currently, most limits are calculated using 2008 home values, thanks to a provision in the economic stimulus law passed in the early months of the Obama administration. If home prices fall, the FHA formula can't take that decline into account.
As a result, the agency currently insures loans above average home prices, particularly in high-cost areas that have seen steep declines. Some of those areas include resort communities.
In San Miguel County, the median home price is $416,000, according to the Department of Housing and Urban Development, down from $770,000 in 2008. That means the FHA guarantees loans in the area for 150 percent of the current median, and would grow to nearly 175 percent under higher limits.
President Barack Obama and many in Congress have called for government to shrink its role in supporting the mortgage market. HUD Secretary Shaun Donovan said in July that letting higher loan limits expire would have no “major impact” on the market.
Given the administration's position, many housing lobbyists thought the push for higher limits had petered out. However, on Oct. 20, the Senate restored the higher cap in a late-night vote of 60-31, adding it to a spending bill for a batch of federal agencies.
The amendment from senators Menendez and Johnny Isakson, a Georgia Republican, restored the $729,750 maximum in high-cost areas and imposed a new fee on those high-value loans backed by Fannie Mae and Freddie Mac. The 15-basis-point fee would cover any additional risk to taxpayers, Menendez said.
As House and Senate lawmakers work to resolve their differences on the spending bill by a Nov. 18 deadline, loan limits have become a bargaining chip.
“After a 60-vote reality in the Senate I'd like to believe that puts us in a strong position,” Menendez said.
--Bloomberg News--
