It sure didn't take long to raise FHA loan limits. The lower limits went into effect October 1st but were gone by mid-November. Now you can get an FHA loan for as much as $729,750 instead of just $625,500
What's important is not the shifting definition of loan limits, it's why they changed. The lending lobby is back and with it the potential to end some of the financial reforms which have emerged during the past two years.
The loan limit debate has been a curious affair because it's simply not clear who "won" or what it is that they accomplished.
First, few people need bigger FHA loans: only 0.75 percent of all FHA borrowers take out mortgages for $500,000 or more.
Second, a return to higher loan limits applies only to FHA mortgages. There has been no increase for conventional financing purchased by Fannie Mae and Freddie Mac, despite a strong push on Capitol Hill for such bigger loans. The top amount for conventional loans remains $625,500. This means the FHA now has a competitive advantage in high-priced markets — precisely what many who oppose the FHA don't want.
Third, a study published by the conservative American Enterprise Institute says the FHA could need $50 billion or more to bulk up reserves. If this is the case then why would anyone want to raise the FHA loan limit and make the program more risky?
The Middle Class
It was in 2008 at an early point in the mortgage meltdown that conventional and FHA loan limits were substantially raised. By increasing the conventional loan limit it was thought that sellers and builders in high-cost areas would be helped.
According to Sen. Robert Menendez (D-NJ), bigger conventional mortgages are still needed because October's lower loan limits were "making a weak housing market even weaker. It also makes it harder for middle-class home buyers to get mortgages when credit is already tight."
But are middle class home buyers really impacted?
The higher loan limits will allow "affluent homeowners to continue receiving a federal subsidy to qualify for mortgage financing costs upwards of $1 million provided they have an annual income of $200,000. This has never been, nor should it be, the mission of Fannie or Freddie, much less FHA," says Edward Pinto with the American Enterprise Institute.
Rep. Leonard Boswell (R-IA) put it this way: "Not one Iowan was harmed by the loan limits expiration, nor will any citizen of the state draw any benefit from restoring FHA’s temporary loan limits increase. In fact, taxpayer dollars back those government-sponsored loans; and therefore Iowa taxpayers will be at risk if there are further defaults in the housing market because of the expansion of this provision."
In the end the higher loan limits for FHA loans were added to a veto-proof appropriations bill, passed by both houses and signed by President Obama.
Despite headlines to the contrary the lending industry remains deeply troubled. The FDIC reports that insured institutions had profits of $35.2 billion in the third quarter — but only by reducing reserve contributions by $16.5 billion when compared with a year earlier.
Hopes for new banking revenues have been stymied on several fronts.
- The effort to install monthly fees for the use of debit cards was quashed by adverse publicity. Huge amounts of potential revenue were lost. For example: 100 million debit cards x a $5 monthly fee = $6 billion per year.
- Merchant "swipe" fees for credit cards were cut in half by the Federal Reserve.
- As part of the "bank transfer" movement at least 650,000 accounts have been moved from major lenders to credit unions.
- Lender investments in the Euro Zone are hugely clouded — for much of October it was uncertain if Greece would accept an offer to write off 50 percent of its bank debt.
"Based on the results of the Brand Vulnerability Study, the top 10 U.S. retail banks are projected to lose a combined $185B in retail deposits over the next 12 months if existing customer frustrations are not addressed," according to research firm CG42.
Multiple bailouts in one form or another have kept the system afloat but more may be needed, not just to maximize profits but to keep the doors open. As William A. Fry explains in his new book, Way Too Big To Fail, "we must also face the fact that, without having received such protections from the government, the banking system could well be insolvent today based on its mortgage-related liabilities."
The bottom line: The financial industry has a need for new profits as well as a serious requirement to reduce costs — thus the recent round of layoff announcements. Think of the fight for higher loans as a trial run, an effort to gauge political sentiment on Capitol Hill.
"Given that lenders did not succeed in the effort to raise conventional loan limits, highly-visible measures such as the outright repeal of Wall Street reform are unlikely," said RealtyTrac.com spokesman Jim Saccacio. "Instead, look for smaller and softer changes, things which are more politically acceptable and easier for elected officials to defend."
One seemingly-logical change could be an end to loan modification programs.
For instance, $45.6 billion was set aside for the Troubled Asset Relief Program (TARP). This is the federal effort which houses the Home Affordable Modification Program (“HAMP”). To date HAMP has helped more than 720,000 families get new mortgages with better terms.
The HAMP program faces several hurdles: It's scheduled to end in 2012, only $2.5 billion (5.4%) of the $45.6 billion has actually been used and the program is hardly perfect: more than 750,000 loan modifications have been canceled.
Without new authorization the HAMP program can simply dry up with most funds unspent — a budget-balancing plus. The catch is that hundreds of thousands of additional borrowers may face foreclosure if there's no modification program in place.
But an end to HAMP would also swell lender foreclosure inventories. That would add pressure to push down home prices, especially in major foreclosure centers. The asset value of lender inventories — their real estate owned — would decline. That's not good for balance sheets or stock prices.
So the irony is this: Lenders may well use some of their political clout to support renewed HAMP funding. It's a program many lenders dislike, but it's better than a marketplace without a modification option.
Peter G. Miller is syndicated in newspapers nationwide and operates the consumer real estate site, OurBroker.com.