NELSON ZIDE
‘Can’t hurt’

Proposed legislation to raise the limits on Federal Housing Administration loans for single-family homes would do much to help homebuyers in states like Massachusetts where housing prices have soared beyond the reach of low- and moderate-income families, according to many supporters.

The bill, filed by U.S. Reps. Barney Frank of Massachusetts and Gary Miller, a Republican from California, earlier this year, has won the support of Realtors and other housing experts. Known as the FHA Single Family Loan Limit Adjustment Act of 2004, the proposed legislation would eliminate a maximum loan limit by decoupling the link to the Freddie Mac loan limit. Currently, the FHA’s maximum loan limit is capped at 87 percent of Freddie Mac’s conforming loan limit of $333,700, which translates into $290,319. The bill would also set the FHA loan limit at 100 percent, vs. the current 95 percent, of an area’s median home price.

Supporters say the changes are necessary in states like Massachusetts and California, where the single-family median home price exceeds $290,319. The median home price in the Bay State, for example, reached $293,500 last year, according to The Warren Group, parent company of Banker & Tradesman. In California, the 2003 median home price was even higher – $363,040 – according to the National Association of Realtors.

“The problem is that FHA mortgage limits have always been relatively low compared to our [home] prices,” said Nelson Zide, a real estate broker with ERA Key Realty Services in Framingham. “The FHA program is not a high-priced area loan program.”

According to Zide, most homebuyers in Massachusetts don’t utilize the program because there are a variety of other loan programs with low down-payment requirements, compared to years ago when borrowers had very fewer options and often turned to FHA loans. But raising the FHA loan limits will help, he said. “It certainly can’t hurt,” Zide said.

Yet some experts point out that under the proposed changes the FHA loan limit could reach as high as $1.5 million in some high-cost areas like metropolitan New York, and that means that very few low-income borrowers would be helped.

“Uncapping the FHA loan limit will, in some metropolitan areas, effectively open up this vital federal program to high-income households who cannot, or who choose not to, make a down payment large enough to qualify for a conventional mortgage,” said Basil N. Petrou, managing partner of Federal Financial Analytics, a consulting firm in Washington, D.C., in testimony provided to the House Subcommittee on Housing and Community Opportunity earlier this month.

While the Mortgage Bankers Association supports raising FHA’s mortgage limits to 100 percent of an area’s median home price, the group also argues that the FHA mortgage limit in any area should not exceed the Freddie Mac conforming loan limit. By increasing the limit to 100 percent of an area’s median home price, FHA borrowers would have access to more housing, according to the MBA. And aligning the FHA mortgage limit ceiling with the Freddie Mac conforming loan limit will also ensure that FHA continues to benefit and focus on first-time buyers and those underserved by the conventional loan market.

Even Freddie Mac expresses some concern about hiking the FHA loan limits.

In prepared comments presented to the subcommittee, Freddie Mac Chief Economist Frank E. Nothaft cautioned, “Currently there are 82 counties that are at the FHA maximum loan limit, including New York, San Francisco and Boston metropolitan areas. Setting the FHA loan limit at such levels will assist very few, if any, lower-income borrowers, as low-income borrowers are unlikely to qualify for mortgages for the large amounts required to purchase in these areas. Maintaining the link with the Freddie Mac loan limit, perhaps in concert with an increase in that limit, would assure that FHA continues to serve its intended borrower population, while assuring families greater access to a wider alternative of housing finance options.”

Nothaft also testified that FHA loans would end up competing with the jumbo mortgages – mortgage amounts that are higher than Freddie Mac’s conforming loan limit. FHA fixed-rate loans, which will carry the lower rates found in the conforming mortgage market, will likely be more desirable to consumers than the higher interest rates on fixed-rate jumbo loans. “While the rate differential varies over time, the interest rate savings in the conforming market can be upward of one-half of a percentage point on 30-year, fixed-rate loans. With such a large financial incentive, many borrowers will opt for an FHA loan over a jumbo loan,” he said.

Understandable Rationale

Spokesman Douglas Robinson explained Freddie Mac’s position last week. “When properly applied, higher loan limits might be useful as long as there was a similar change in the conforming loan market limits so there won’t be a disruption of the marketplace,” he said.

Aaron Gornstein, executive director of the Citizens’ Housing and Planning Association, said that loan programs must be tweaked occasionally to keep up with escalating housing costs.

“Because of the high cost of housing here in Massachusetts and New England, if you don’t raise the limits for FHA mortgages, it’s going to be extremely difficult for people to use the program,” said Gornstein.

It’s not unheard of for programs that help homebuyers to be changed to reflect increasing home prices. Last May, for example, the state adjusted the SoftSecond Loan Program – which combines a conventional first mortgage from a bank with a state-subsidized second mortgage – in order to help more first-time homebuyers. The income limits of households using the program were raised in Boston and other high-priced communities and the down payment requirement was lowered from 5 percent to 3 percent.

The National Low Income Housing Coalition, a Washington, D.C.-based affordable housing advocacy group, has offered neither formal support nor opposition to the measure.

“We’re fine with the raising of the limits and we certainly understand the rationale behind doing so. It’s needed because in many places the cost is so high that the FHA loans limits just aren’t workable,” said Kim Schaffer, the group’s outreach director. “But raising the limits is still not getting to the root of the problem, which is that there is a lack of affordable housing. So we’re supportive of measures that actually work to expand affordable housing and seek to adjust the underlying causes as well as the symptoms of that.”

Currently, there are 15 cosponsors to the FHA Single Family Loan Limit Adjustment Act of 2004. Groups like NAR and the National Council of State Housing Agencies have offered their support of the bill. The Subcommittee on Housing and Community Opportunity of the House Committee on Financial Services held a hearing on the legislation on June 16. The bill will next go to the financial services committee itself for another hearing and proceed to the full House for a markup.

The last time FHA loan limits jumped significantly was in October 1998 when the maximum high-cost limit increased from 75 percent of Freddie Mac’s loan limit to 87 percent.

The bill is similar to legislation introduced by both Frank and Miller last year that increased the FHA loan limits for the construction of multifamily housing. Under that legislation, which was passed last year, the per-unit maximum loan limit increased from $194,190 to $218,465. Supporters said the increase helps spur the private construction of affordable housing in the nation’s high-cost areas like New York, San Francisco and Boston.

Aglaia Pikounis may be reached at apikounis@thewarrengroup.com.