Barring Congressional action, Federal Housing Administration (FHA) loan limits will revert back to loan limits determined under the Housing and Economic Recovery Act (HERA) for loans insured by FHA on or after October 1, 2011. As a result, FHA loan limits would likely decline
in 669 of the 3,334 counties or county equivalents that are eligible for FHA insurance. The remaining 2,665 counties are unlikely to experience a change in loan limits.
FHA loan limits restrict the size of mortgages that can be insured by the Federal Housing Administration (FHA). Prior to 2008, the National Housing Act, as amended in 1998 Mortgagee Letter 1998-28, required that FHA mortgage limits be set at 95 percent of the median house price in that area. However, FHA loan limits could not exceed 87 percent or go lower than 48 percent of the conforming mortgage limit established by the Government Sponsored Enterprises (GSE) in any given area. For the high-cost states and territories (Alaska, Guam, Hawaii, and the Virgin Islands), the National Housing Act allowed mortgage limits to be 150 percent of the national ceiling.
To mitigate the effects from the economic downturn and the sharp reduction of mortgage credit availability from private sources, Congress temporarily increased FHA loan limits in 2008. The
Economic Stimulus Act (ESA) enacted in February 2008 stipulated that FHA loan limits be set temporarily at 125 percent of the median house price in each area.1 The FHA loan limits could not exceed 175 percent of the 2008 GSE conforming mortgage limit of $417,000; nor be lower
than 65 percent of the same 2008 GSE conforming loan limit for a residence of applicable size for any given area. Also, ESA stipulated that mortgage limits for Alaska, Guam, Hawaii, and the Virgin Islands be adjusted up to 150 percent of the national ceiling.
Five months after passing ESA, Congress enacted the Housing and Economic Recovery Act (HERA) in July 2008, which established the Federal Housing Finance Administration (FHFA)and assigned FHFA the responsibility to establish conforming mortgage limits for the nation and for high-cost areas.2 Since 2009, the national conforming mortgage limit has been set at $417,000. Mortgage limits under HERA are set at 115 percent of the county with the highest
median house price within that MSA but cannot exceed 150 percent nor be lower than 65 percent of the GSE conforming mortgage limit. Similar to previous regimes, Section 214 of the National
Housing Act applies in HERA. This section allows mortgage limits for Alaska, Guam, Hawaii and the Virgin Islands to be 150 percent higher than the ceiling.3 Finally, it should be noted that, when setting 2011 and prior year HERA limits, FHA has followed a policy of not allowing
declines relative to prior HERA limits. This rule, which is consistent with the Act’s policy of not allowing declines in the baseline loan limit, means that 2011 HERA limits are sometimes based on the median price level of an earlier year. Because the first cohort of HERA limits was
determined using 2008 median prices, the 2011 HERA limits in all cases are based on median prices that are more recent than the 2007 median prices used in setting the 2008 ESA limits.
Seven months after passing HERA, Congress enacted the American Recovery and Reinvestment Act (ARRA) in February 2009. ARRA stipulated that FHA loan limits for 2009 be set in each
area at the higher dollar amount when comparing loan limits established under 2008 ESA requirements and limits calculated for 2009 under HERA. 4 These loan limits have since been extended by Congress each year, most recently through the Continuing Appropriations Act of 2011, and are the limits that are currently in effect for FHA loans. Barring Congressional action, FHA loan limits will revert back to loan limits determined under HERA for loans insured by
FHA on or after October 1, 2011.
II. Market Impact of Potential Loan Limit Declines
For the U.S. as a whole, approximately 3% of loans by count (33,301) and 6% by dollar volume ($14.2 billion) endorsed in calendar year 2010 would not have been endorsed had HERA limits been in effect. In calendar year 2011 to date (January through April), approximately 2% of endorsed loans by count (6,673) and 7% by dollar volume ($2.8 billion) would have been
affected.
It is important to note that streamline refinance loans would not be affected by any reduction in area loan limits. Loans insured prior to October 1, under higher loan limits, would still be eligible for streamline refinancing in the future, even if their outstanding balances remain above the loan limits in effect at that time.
Additionally, loan limits for the FHA reverse mortgage program, the Home Equity Conversion Mortgage (HECM), are established under separate legal authority from loan limits for the forward loan program. Loan limits beginning on October 1, 2011 for HECM loans are currently
under review and additional guidance will be provided in a subsequent communication to borrowers and the industry.
