WASHINGTON — Lawmakers are near a deal to increase the maximum size of mortgage loans that can be insured by the Federal Housing Administration, a crucial source of mortgages for first-time home buyers, congressional aides said Monday.
The likely agreement between House and Senate lawmakers to lift the loan limits is being hashed out as part of a spending bill for several federal agencies that is expected to clear Congress by Thursday, aides said.
The loan limits fell on Oct. 1 to $625,500 for mortgages backed by the FHA, Fannie Mae and Freddie Mac in expensive markets like New York, San Francisco and Washington, D.C.
The agreement being worked out between House and Senate negotiators wouldn't include loans backed by Fannie and Freddie, which are the main source of funding for U.S. home loans. Instead, the deal would restore the FHA's loan limits to as high as $729,750 in high-cost cities through 2013. FHA charges mortgage insurance premiums for its borrowers, which adds to the cost of obtaining a loan.
The deal is a mixed bag for housing-industry lobbyists, who mounted an intense push in recent weeks to restore higher limits through the end of 2013 for Fannie, Freddie and FHA. They argued that the decline in limits is harming an already-shaky housing market.
The effort to raise the loan limits was led Sen. Robert Menendez (D., N.J.) and other Democrats and backed by some Republicans in expensive housing markets in California.
The FHA doesn't make loans directly but insures lenders against defaults and charges insurance premiums to borrowers. Home buyers with FHA-backed loans can take out mortgages with minimum down payments of 3.5%. The agency currently backs about a third of all new mortgages or home purchases, up from around 5% in 2006.
Raising the limits for FHA-backed loans could carry less political risk than doing so for Fannie- and Freddie-backed loans, but it comes at time when the agency's finances appear increasingly shaky and many lawmakers want to reduce the government's role in the housing market.
"This is just a subsidy for higher-income households," said Joseph Gyourko, a real estate and finance professor at the University of Pennsylvania's Wharton School.
While the FHA has avoided a taxpayer rescue so far, a study published last week by Gyourko predicted that the agency will ultimately need a taxpayer bailout of least $50 billion to $100 billion. An annual report on the FHA's finances is due Tuesday.
In contrast, Fannie and Freddie have been propped up with taxpayer money for more than three years and are the subject of mounting criticism on Capitol Hill for nearly $13 million in bonuses paid to executives at the start of this year.
Many House and Senate Republicans battled against raising the size of loans that Fannie and Freddie can guarantee, arguing that doing so would continue their bailout, which has cost taxpayers nearly $151 billion to date.