The Department of Housing and Urban Development confirmed last week that it is considering raising the Federal Housing Administration loan limits and may introduce legislation to Congress by late 1994 to allow more home buyers to purchase homes in high-cost areas.
While raising FHA loan limits had been rumored for some time, HUD declined to speculate about its possibilities. Even in its testimony before Congress, the department didn't address the issue specifically.
However, the matter was confirmed in an interview with The Mortgage Marketplace by Nicolas P. Retsinas, HUD assistant secretary for housing and federal housing commissioner.
"Raising the loan limits is an option we are looking at," Retsinas said. "The president, when he was candidate Clinton, pledged to strongly support raising the maximum FHA mortgage limits. And certainly, with that kind of plank, it is an option we are considering."
The department has just started considering the increase and must submit proposed legislation to the Office of Management and Budget for review prior to approaching Congress, said Angelina Ornelas, a HUD spokeswoman.
"But there isn't enough time in this [legislative] cycle to introduce any proposals," Ornelas said. "It may be introduced next year, probably before the last session of Congress."
Earlier last week, Retsinas told Congress that HUD must consider a variety on new initiatives to help bolster the FHA Mutual Mortgage Insurance Fund, including using alternative forms of financing and mortgage products to help first-time home buyers become homeowners and permitting FHA to enter into partnerships with state and local governments, secondary market agencies and other lenders to assist single-family affordable housing efforts through risk-sharing arrangements.
But aiding home buyers in high-cost areas, a move that raising the FHA loan ceiling would accomplish, was at the top of Retsinas' list of priorities.
Mortgage bankers like the idea because higher loan limits would make more home buyers eligible for FHA loans and, therefore, would increase the number of home buyers channeled to them through the Federal National Mortgage Association. But mortgage insurers question the effectiveness of higher loan limits at a time when FHA is experiencing financial difficulties.
Both sides aired their views before Congress July 26, when the House Banking Subcommittee on Housing and Community Development heard arguments on the solvency of the Mutual Mortgage Insurance Fund.
"FHA is drowning in foreclosed properties and nonperforming loans. Raising the limits will only exacerbate those problems by increasing the frequency and the severity of FHA's losses," testified Charles M. Reid, president of the Mortgage Insurance Cos. of America.
Part of the problem, Reid said, is that there is a misconception that people with higher incomes are better credit risks than those with lower incomes.
"Congress should dismiss the arguments... that high-income people are less risky than low-income people simply by virtue of their income," Reid said.
Mortgage bankers, however, argued that raising the limits would help protect the MMIF.
"Like any insurance company, FHA must spread its risk of possible loss," said Ron J. McChord, president of the American Mortgage and Investment Co. and a spokesman for the Mortgage Bankers Association of America, in his written statement.
"While MBA believes that mortgage limits play a legitimate role in targeting FHA activity, the limits must be reasonable to allow FHA to tap lower-risk markets. FHA data indicate that higher balance loans have much lower claim rates than low-balance mortgages."