In response to the recent recovery and a strengthening housing sector, the Federal Housing Administration (FHA) has announced their intentions of limiting their involvement in the market. On the first day of the New Year, the agency will commit to reducing the amount they intend to insure on high-cost mortgages. As of January 1, all FHA loans will be capped at $625,500 in high-cost areas. By comparison, those same areas are currently capped at $729,750.
Implementing lower loan limits is an important step towards recovery, as private capital will be returning to portions of the market. The changes will concentrate on those borrowers that are still under-served and permit them to acquire a more appropriate loan.
The parameters set fourth by the upcoming changes will maintain current limits in regions where housing costs are lower than $271,050. According to the Department of Housing and Urban Development, the cap will impact approximately 650 counties across the United States. The changes will allow the FHA to refocus their efforts on “less wealthy” homebuyers. Again, higher-cost areas will remain unaffected.
The FHA’s current trajectory is not unexpected, as the agency was put in charge in 2008 amidst the housing market crisis. At the time, the FHA increased current caps as a means of helping more homebuyers. According to FHA representatives, “the agency quadrupled its activity as the private market retreated.” However, in doing so, the FHA was burdened by defaults.
No later than September of this year, the FHA was forced to ask Congress for $1.7 billion, as a means of righting their balance sheets.
FHA Commissioner Carol Galante said the new changes are “an important and appropriate step as private capital returns to portions of the market and enables FHA to concentrate on those borrowers that are still under-served.”
The mortgage loan limits for FHA-insured reverse mortgages will remain unchanged. The FHA reverse-mortgage product, known as the Home Equity Conversion Mortgage (HECM), will continue to have a maximum claim amount of $625,500, with actual loan limits based on property value, borrower age, and current interest rates.
New mortgage rules are also expected to help prospective buyers from entering into a loan that they are unprepared for. One of the most prominent changes will occur on January 10th. No more than two weeks into the new year, banks will be required by the Dodd Frank law to ensure that monthly mortgage payments are affordable to respective buyers. Tougher regulations will be enacted to reduce the amount of homeowners that can potentially default on their loan.