Did you hear? The FHA is reducing the maximum size of the mortgages it will back, something Fannie Mae and Freddie Mac have already begun doing. At the beginning of 2014, FHA-insured loans in popular locations will step down to $625,500 for a single residence from $729,500 besides Hawaii, which will be from $657,800 to $721,050.
The FHA has previously insured smaller loans so first time borrowers and people with modest incomes could get mortgages. Its role changed and Congress increased the limits in 2008 during the financial crisis, when home loans not backed by the government weren't being given out.
Now, banks have started to loan out more often to credited borrowers without government support with mortgages called "jumbo" loans. Loans that fall within the FHA limits are called "conforming" loans. Carol Galante, FHA commissioner stated, "Implementing lower loan limits is an important and appropriate step as private capital returns to portions of the market," in reference to the insured loan amounts. She also said that, "enables [the FHA] to concentrate on those borrowers that are still underserved." [LA Times]
The popular locations, which these new limits will be implemented include Los Angeles, Orange and Santa Barbara county, the San Francisco Bay Area and Silicon Valley. The limit for locations where housing costs are relatively low, will remain unchanged at $271,050.
Middling locations in counties like Riverside and San Bernardino will be limited to $355,350. San Diego County and Ventura County will have limits set at $546,250 and $598,000, respectively.
There is a link in the resources for the Department of Housing and Urban Development for more details on the limits in areas not located in the Los Angeles area. (Document number 13-44, on the left hand side)
Lenders like us are enthusiastic about these loan limits for the gap that is created will be filled in by us. Even banks "have been competing to make loans to the most creditworthy jumbo borrowers by offering rates that are in some cases lower than conforming-loan rates. Before the crisis, jumbo rates were at least a quarter of a percentage point above conforming loans, and until last year, jumbo loans were more than 0.5% higher." [WSJ]
This is why it seems like a small risk for the Federal Housing Financing Agency to start taking these appropriate steps now. The government wants to gradually create a system in which they can stop insuring these loans. According to Mortgage Finance, banks made $59 Billion in jumbo mortgages in the second quarter, up 20% from the previous-year period, which was also a six-year high. It seems that now there is enough liquidity in the market for us to be able to handle a drop in the conforming limit.