Last month 29.9 percent of Bay Area home purchases were made by way of FHA backed loans, up from 25.4 percent in April 2010.
On Wednesday, a House subcommittee will discuss a draft bill which would raise the minimum down payment for FHA loans from 3.5 percent to 5.0 percent and lower the maximum loan size to 125 percent of the county’s median home price (versus the current maximum of up to $729,750 in high-cost areas).
∙ San Francisco Recorded Sales Activity Down 1.4% In April [SocketSite]
∙ Super Conforming Limits In San Francisco Set To Expire September 30 [SocketSite]
While noting that an unsponsored bill is very far from law, my impression was that the limitation is the lower of 125% of county median or 150% of the unadjusted conventional loan limit ($417k x 1.5 = $625).
(i.e. If the SF median was $1M the FHA would not be making $1.25M loans)
The power to terminate FHA participation due to high early payment defaults is interesting as well.
http://financialservices.house.gov/UploadedFiles/fha_rural.pdf
Also, the paying of closing and other transaction costs with FHA funds would appear to be restricted.
These more restrictive lending standards will cause pain for some, but will make the market healthier in the long run.
The 125% of median limit would allow purchases up to 861K in San Francisco and 723K in San Mateo County. It would be interesting to see how sales dynamics would be impacted if a county-by-county loan limit were actually put in place. A regional limit based on the Bay Area median might produce fewer distortions. If the April median were the reference pint, this would permit purchases up to 473K for the Bay Area.
If it becomes law it will certainly have a downward pressure on RE prices, particularly in the $600K-$800K range. First, it becomes harder to qualify (5% instead of 3.5%) and those that do would qualify for lower max mortgages.
Given that 30% of transactions were FHA in San Francisco, it might have a very noticeable impact on housing in that price range.
“The 125% of median limit would allow purchases up to 861K in San Francisco and 723K in San Mateo County.”
While I could be wrong, my impression of the hard cap of $625k regardless of local median was based on this:
“‘‘(ii) 150 percent of the dollar amount limitation specified in the sixth sentence of section 305(a)(2) of the Federal Home Loan Mortgage Corporation (12 U.S.C. 1454(a)(2)) for a residence of the applicable size, without regard to any annual adjustment provided for in such sentence;”
I would prefer lowering the loan amount to increasing the down payment, but both are necessary for sure.
Who determines the median? FHFA? If so, does that mean San Francisco-San Mateo-Redwood City MSA could have a different cap from San Jose-Sunnyvale-Santa Clara MSA?
5%?
that’s nothing.
that’s only $50k down on $1M and only $15k more than the previous down of 3.5%.
Yeah, the 5% is still ridiculously low. I would save the 1.5% difference in like 1 month 😉 Big fracking deal. The Guvt is still playing the “soft landing” card and putting taxpayer money at risk.
“5%?
that’s nothing.”
Agreed. It should be higher, and likely needs to be for the private loan market to come back. But instead we have more government subsidies to prop up the housing market.
“that’s nothing.”
You’d think that, but I just saw this about a survey of household’s ability to cope with a $2k expense and how nearly 50% would find that difficult!
“Taken together with those who would pawn their possessions, sell their home, or take out a payday loan, 25.7% of respondents who were asked about coping methods (equal to 18.6% of all respondents) would come up with the funds for an emergency by resorting to what might be seen as extreme measures,” the authors write. “Along with the 27.9% of respondents who report that they could certainly not cope with an emergency, this suggests that approximately 46.5% of all respondents are living very close to the financial edge.”
http://blogs.wsj.com/economics/2011/05/23/nearly-half-of-americans-are-financially-fragile/
“You’d think that, but I just saw this about a survey of household’s ability to cope with a $2k expense and how nearly 50% would find that difficult!”
No doubt a lot of families live paycheck-
to-paycheck, but many of those households shouldn’t be buying houses either. If you can’t absorb a $2K expense, you should reconsider whether buying housing is for you. During the boom, plenty of people made the wrong calculation on this.
The limits won’t really change from the 625K they were heading anyway, the closing costs and higher downpayment add another $30K to the savings, which will knock out a moderate number of people, but the killer here is the threat that the gravy train for the banks will be cut off if the early loss rates are too high.
The banks will protect themselves against that risk by demanding more savings. Probably something like $20K more in reserves. So everyone will need to come up with an additional $50K: $30K in costs and 20K in reserves. Probably 1/3 of the buyers have it to start with, the other 2/3 will need to save it. 30% use an FHA loan, so it knocks about 20% of the people out of the market for a few years while they save up. FHA sets the low standard for the market: if they tighten, everyone else will tighten up the line.
You knock out 20% of the customers in a market and prices are going to drop like a rock. I can’t believe the government has the guts to do that.
No functioning industry could survive a loss of 20% of its market without an enormous disruption. I can’t believe it would pass, but 12 months later will be the right time to buy if it does. Interest rates will probably fall too just from the reduced demand.