Update: HUD has released the new loan limits. Find your local loan limit here.
So-called FHA reform reached an important milestone on Friday
when the U.S. Senate overwhelmingly approved its version of the legislation.
The bill, which passed by a vote of 93-1, seeks to make the
Federal Housing Administration more relevant in the current housing and mortgage
lending environment by expanding the agency, loosening some underwriting standards,
and raising its current restrictive loan limit.
The FHA was established in 1934 to help borrowers, particularly those with
low incomes, purchase homes by guaranteeing banks that those loans would be
repaid should the borrower default. But the agency's loan limits have
generally lagged behind those of Freddie Mac and Fannie Mae and as home prices
climbed dramatically and lenders with looser underwriting standards proliferated
the agency became less and less of a player in the mortgage market.
Over a ten year period ending last December the FHA's share of new mortgages
fell from 9.1 percent to 1.8 percent according to Inside Mortgage Finance. A
major reason for the slide is the FHA loan cap which, in many parts of the country
such as both coasts, falls short of covering the purchase price of even a low
end house.
FHA insured loans have been mentioned as a possible escape hatch for borrowers
who may be unable to make payments on their current adjustable rate
mortgages when their interest rates reset over the next year. The restrictive
loan limits, however, make that impossible for many of those borrowers. There
is also a theory that a more widely available federal guarantee would encourage
lenders to make more loans in the current tight credit environment.
The Senate version of FHA reform would raise the limit on
FHA loans from $362,000 to at least $417,000 which is the current limit on Freddie
Mac, Fannie Mae, and Veterans Administration loans.
The FHA estimates that it may be able to help some 200,000 borrowers who are
facing foreclosure with the new limits coupled with loosened underwriting standards
which were announced by the president several months ago.
In October the House of Representatives passed legislation similar to that
passed in the Senate but some differences between the two bills will have to
be hammered out before a final version is sent to the president for his signature.
The House bill would raise the loan limit as high as $829,750
in certain areas of the country but the biggest stumbling block to a compromise
is a feature of the House bill which establishes a new housing trust fund for
troubled borrowers and would require FHA to contribute to it.
Also on Friday the Senate passed a separate borrower relief bill which would
end, for three years, a provision in the tax code which has bitten many a homeowner
after foreclosure or a loan workout. Under current rules the Internal Revenue
Service requires lenders to send borrowers and the IRS a form detailing any
loan amounts written off by the lender after a foreclosure, short sale, or loan
restructure. The IRS treats that forgiven debt as ordinary income and taxes
the borrower accordingly.
The House had earlier passed similar legislation but without the three year
sunset provision.
In other mortgage news, Reuters reported on Friday that the hotline established
by the HOPE NOW alliance had received 45,000 calls in the three
days after its establishment was announced by President Bush. The hot-line provides
foreclosure prevention counseling to borrowers who qualify for an interest rate
freeze worked out between the Treasury Department and major lenders. The telephone
number for the program is 1-888-995-HOPE.