Congress reinstates higher FHA mortgage limit

The San Francisco Chronicle reports:

The maximum loan backed by Fannie Mae, Freddie Mac and the Federal Housing Administration in these areas had dropped to $625,500 from $729,750 on Oct. 1. Late Thursday, Congress voted to reinstate the higher limit on FHA loans through 2013, but not on Fannie and Freddie loans. It was a compromise between some Republicans who want the government out of the mortgage market and legislators from areas with high housing costs.

The move was a little surprising, considering that FHA was created to provide credit for marginal borrowers and makes loans with as little as 3.5 percent down.

"This is all about members of Congress having trouble letting Fannie or Freddie take on any more risk. They are both politically toxic and (legislators) felt pressure to reraise the limit, so this was the politically expedient way of doing it," says Edward Mills, an analyst with FBR Capital Markets.

Unlike Fannie and Freddie, FHA has not needed a taxpayer bailout, although according to one report, there is a 50-50 chance it could in the next couple of years, says Keith Gumbinger, a vice president with HSH.

Borrowers in qualifying counties who need loans between $625,000 and $729,750 will have two options: an FHA loan or a jumbo loan in the private market. FHA requires initial and annual mortgage insurance premiums, but it could offer rates that are perhaps 0.75 percent lower than private-market jumbos, Gumbinger says.

Great moments in central planning.