Frank Statement on FHA Loan Limits
Today, House Financial Services Committee Chairman Barney Frank (D-MA) issued the following statement regarding recent press reports on FHA loan limits.
“Recent press reports about FHA loan limits have created the mistaken impression that federal loan limits allow for luxury home loans of up to $729,750 anywhere in the nation. This is simply not true. These reports overlook the fact that the primary factor for establishing FHA loan limits is the median home price in any given area. Thus, in a region where the median home price is low, the FHA limit remains correspondingly low.
“Since home prices are the most varying in our economy, Congress set an upper loan limit of $729,750 as a secondary factor to be considered only if the median house price in the corresponding area is high enough. This means that there are only 77 counties in the entire country where an FHA loan as large as $729,750 can be made. In a majority of the nation’s counties, the loan limit is $271,050, and the average FHA loan in fiscal year 2009 was only $185,278. In fact, less than 2 percent of FHA’s outstanding loan portfolio consists of loans which exceed $417,000.
“FHA always has and will continue to focus on loans to middle and lower income families. However, because real estate markets are the most local of markets, a single national standard makes no sense. For years, the FHA was effectively out of the market in major portions of California, New York, and Massachusetts, because the restrictive, one size fits all national ceiling was well below median home prices in those areas. Congress changed the law to reflect this reality and allow the FHA to finance higher cost homes in higher cost areas so that affordable mortgage credit was available to middle income families everywhere.
“This was not a new approach; the law already permitted FHA loans to be 50 percent higher in Alaska and Hawaii, because of higher home prices in those areas. And, the concept of housing price and income-based differentials is not new to federal housing policy. For decades, home price and income limits have been in place for various HUD and mortgage revenue bond programs in order to reflect varying local area characteristics. The changes Congress made in 2008 continue to follow this same principle, but raise the artificial ceiling which had kept loan limits from keeping pace with local home prices in high cost markets.
“Finally, instead of representing a financial threat to FHA, allowing these higher priced loans allows for more geographical diversification for FHA. And, the just recently completed audit of FHA concluded that higher cost loans actually have a lower claims rate than lower cost loans.”