HUD proposes higher FHA mortgage limits

Real Estate Weekly, Feb 11, 1998

To simplify the process and make mortgages available to more people in high-priced urban areas, HUD wants the limit for Federal Housing Administration (FHA) insured home mortgages to be raised and unified across the country.

The proposal, explained at the National Home Builders convention in Dallas and then to reporters during a conference call with Housing Secretary Andrew Cuomo last week, is expected to be formally proposed by President Bill Clinton during his budget presentation on February 3rd.

While the upper limit for one- to four-family home, cooperative and condominium loans today is $170,362, that number varies widely in the nation's 3,200 counties. The range depends on the median home price for the area, and that ceiling can be as low as $86,317 - where housing costs are lowest but still would be less than the cost of a new home.

Although the maximum is available in higher cost communities, both home buyers and lenders are often confused about what they can spend.

Since the FHA-insured bank loans are normally re-sold to Freddie Mac and Fannie Mae, the proposal for a nationwide maximum of 5227,150 is merely equivalent to the loan amounts those entities already buy.

HUD officials say in 2,200 of the counties, the lower limits currently apply, removing the opportunity for home buying from those that can afford more expensive homes.

These buyers are also the least likely to default on a loan, and Secretary Cuomo was not shy in predicting that if more buyers with good credit take advantage of the program, they would be making money rather than losing it.

"This is getting us into a higher end of the market which we forecast will make money," Cuomo said. "We have both a lower claim and higher recovery on the higher end. So it is less risky."

Still, FHA loans have a very high default rate - in the 9 percent range - and critics say more affluent home-buyers can already be served by the private sector and it would be better for HUD to work more with potential home-buyers to avoid default.

Secretary Cuomo predicts the higher maximum would also make home ownership more available to minorities in higher cost urban areas, where home prices would otherwise not qualify for the FHA insurance. Additionally, in areas like California and New England, prices are generally more than the current FHA maximums, thus cutting out many potential buyers.

"As an urban loan program, this is a home run," said Cuomo. "The FHA takes higher risk loans than the private market, and these are loans that the private market will not take." So if these buyers do not qualify for an FHA loan, he claims, they would likely not qualify for most loans and could not buy a home.

In the last fiscal year in the FHA's New York City metropolitan office area, that includes parts of New Jersey, Connecticut and all of Long Island, as well as counties going halfway to Albany, where there is another office - 13,719 loans were endorsed.

The agency had 21,071 cases assigned in FY97, some carry-overs from the previous years and others that are still in progress, as well as those cases that were rejected.

While most New York buyers will find prices in Manhattan too rich even for a pumped-up FHA blood, under an expanded program they could qualify in the northern portions of Manhattan and the outer boroughs, where prices are still moderate.

Maximum prices for two- to four-family homes would be increased proportionately, HUD officials said. Currently, the maximum price allowable for a two-unit purchase is $217,987; the three-unit maximum is $263,475; and the maximum price for a four-unit home is $327,450. Specific higher pricing under the proposal was not available, but sources indicate those numbers will likely rise to about $296,649, $351,300, and $436,600, respectively.

Sellers shouldn't be complaining about "nitpicking" FHA inspectors, Cuomo said in response to a question, because otherwise the buyers wouldn't even be able to buy the home.

"If the person doesn't get an FHA mortgage, the person won't get a mortgage, period. It means either making a sale or not making a sale," he said.

While these home-buyers pay a 2.5 percentage point premium, that can be reduced by 50 basis points if they take a home-buyer's class.

Those classes should be improved, says one group critical of the expansion plan, the National Training and Information Center, which advises community groups on helping low-income buyers.

Although the ideas for increasing the maximum loan amounts were floating around the agency last year, they were never brought to Congress as a formal proposal. Now, Cuomo says, they want to make sure they become law and don't want to let these home-buyers have to go somewhere else and perhaps pay higher rates.

"That segment of the market is controlled by several private companies," Cuomo noted. "That's why there is opposition."

After streamlining the agency and reducing over 80 manual processing centers to four automated centers, Cuomo insists "We're functional, we're efficient, we want this law changed."