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Will FHA loan limits go even higher?

Thanks to the Economic Stimulus Act of 2008, maximum FHA loan limits were pegged at $729,750 for a single family residence and were recently extended for another year. And there is at least one legislator who wants to increase these limits even more – to $839,750.

Barney Frank!

According to a recent interview, the Massachusetts Democrat who is chairman of the House Financial Services Committee, said he plans to introduce legislation next year raising the maximum F.H.A. loan by $100,000, to $839,750. He also stated that his bill would make the new limits permanent.

One area of the country where this is having an impact is San Francisco – where FHA has historically been pretty much a non-factor when it comes to financing your home.

And not everyone thinks that higher FHA loan limits are a good idea:

Kenneth Donohue, inspector general for the Department of Housing and Urban Development, the parent agency of the F.H.A., said the higher loan limits were increasing the potential risk to the F.H.A. Last week, the agency said its cash reserves had fallen below their Congressionally mandated minimum because of the large volume of foreclosures.

He sees another risk: larger loans will be a greater draw for those who want to commit fraud. That would exacerbate a problem already besetting the agency.

Whenever there is very little money used as a down payment (3.5%) it really requires careful analysis of what is at risk and what the long term plans of living there are. While property values have historically increased in many parts of the country, this is no longer a given – and if the financial model is for property values to simply hold their value and not increase or decrease – many times buyers will lose money on a property after Realtor commissions are calculated.

Even some San Francisco agents who are doing F.H.A. deals worry about the long-term consequences. Real estate commissions are 6 percent. If the value of a property were to hold steady, a seller who put down the F.H.A. minimum would suffer a loss after fees. And while the Bay Area has traditionally been an excellent investment, the last few years have proved a big exception.

“Is this going to be the next wave of the housing downturn?” asked Eileen Bermingham, an agent with Pacific Union. “With such a minimal down payment, how do we make sure people don’t get in over their heads?”

Some of America’s fastest growing suburbs are now seeing slower growth due to the recession. Of the 53 cities with populations of 100,000 and up that grew at least 10% every decade since 1970, 24 have lost population over the last two years, according to USA Today.

Of these “boomburgs” — suburbs that grew into major cities —15 are expected to see population gains of less than 10% by the end of this decade.

“They will drop out of boomburb status. “Some boomburbs have gone bust; some are still thriving,” Robert Lang, professor of sociology at the University of Nevada, Las Vegas, told USA Today.  

Some of the suburban cities that are being affected are Coral Springs, Fla., Bellevue, Wash. and Peoria, Ariz.

Although growth may be slowing in some of these suburban cities, that doesn’t mean growth can’t and won’t pick up again. Some suburbs have transformed from mainly residential communities to cities with thriving business districts. So these areas will continue to attract people willing to move there for work.

Also, some people who are shopping for a home will find themselves having their pick up housing bargains wherever they choose to live. Although some Americans are attempting to downsize and move away from buying McMansions, there will always be people who want to move to the suburbs to get more house for their money than in a nearby city with an expensive housing market.

As I have traveled throughout the country over the last year, I have noticed that people in different places have different attitudes about foreclosure.  Jimmy Buffet’s song Changes in Latitudes, Changes in Attitudes could fit nicely into this scenario – people in Miami, Florida seem to generally feel different about foreclosure than those people living in Fairfax County, VA.

Or in the West, people in California, Nevada or Arizona might feel different about foreclosure than those living in Washington or Colorado.

Recently in Phoenix, Arizona a homeowner wondered aloud (and blogged about it) “what exactly is keeping you in your current mortgage?”

The above person might qualify for the Obama 125% refinance plan, but at best that might only make their payment $1300/mo.  Not to mention that the banks are not just making the refinances happen.  They refuse to live up to their side of the bailout.  If instead a plan was in place to force lenders to readjust principle balances (not interest rates) to a point where the home owner was not completely underwater then perhaps the home owner might full well consider staying in their home.  At this point, I think someone in the above situation has NO SENSIBLE reason to stay in the home.  They have far more to gain crushing their credit and walking away.  Taking the positive cash flow and investing in their future.  If the bank were in the home owners situation they would certainly walk away.  It’s a business decision.  Sounds cold, but the current bailout isn’t helping much of anyone.  If we are going to throw money at the problem at least lets be pragmatic about it.

One of the primary items that I recommend being aware of is the anti-deficiency laws in your particular state. Translation: whether or not the lender can go after you personally for any “shortfall” if your house does indeed go to short sale or foreclosure.  Each state has different laws, so before you make whatever decision you are going to make (or be forced to make due to economic hardship) be sure you have done your research regarding this issue.

Because no matter where you live, one of the worst things that you can do is to make an uneducated decision and be surprised by the outcome.