FHA Chief Argues That Loan Limits Should Be Reduced

June 10, 2008
By: Bill Swindell, Congress Daily

Federal Housing Administration Commissioner Brian Montgomery said Monday the loan limit for his agency's mortgage insurance program should be reduced to $550,000 from nearly $730,000 because the current maximum level serves very few borrowers across the country.

Montgomery called the $730,000 level -- which was established under the economic-stimulus package Congress passed this year -- an "awfully big number" that only serves 75 counties out of 3,300 nationwide. The FHA level began the year at $362,000.

In remarks to the National Press Club, Montgomery sided with a Senate housing measure that would set the FHA loan limit at a maximum of $550,000 in high-cost areas, applying the same standards to loans from government-sponsored enterprises Fannie Mae and Freddie Mac.

"We think that the Senate bill at $550,000 is a good place to settle, again recognizing the vast majority of FHA activity is below $271,000," he said.

Lawmakers are wrangling over the loan limit as part of negotiations over an omnibus housing package, an especially pressing issues because the current levels expire at year's end.

A competing House measure would retain the FHA and GSE levels at nearly $730,000. House Financial Services Chairman Barney Frank contends that level is needed to help his home state of Massachusetts and other high-cost areas such as New York and California that have been shut out of the FHA and jumbo-loan market.

But Montgomery disagrees, noting that California's median home income is near $520,000, so the Senate bill would be able to serve a large segment of Golden State homebuyers. "We want to be able to account for California," he said.

Montgomery also made a push for lawmakers to ban seller-assisted down payments under the FHA program, arguing they have a foreclosure rate that is three times greater compared to borrowers who make their own down payment.

Such seller-assisted loans account for a third of the agency's portfolio. The Senate FHA bill would include such a ban.

"We are concerned about this business because the substantial losses affect FHA's bottom line and FHA's ability to serve American citizens who need access to prime-rate home loans," he said.

Montgomery announced Monday that his agency would resubmit its proposed rule to ban the practice. Two federal district courts have previously thrown out the proposal, which is opposed by some nonprofit organizations that provide down-payment assistance.

"It is clear that the priorities of Commissioner Montgomery do not lie with low- to middle-income families to whom he is sworn to serve," said Scott Syphax, president of Nehemiah Corp. of America, the largest down-payment assistance provider.

"At this time, it is critical that the consumer groups, policy makers, government and elected officials, real estate industry and those who serve first-time homebuyers in this country stand up and fight this rule that will do serious damage to a particularly vulnerable group with little political capital at this crucial time," Sypahx said.

On another issue, Montgomery called for his agency to be able to price insurance on the basis of the borrower's risk of default; it already has taken some steps administratively to implement the policy.

The House FHA bill would grant the agency such authority, though it would also give it permission to reduce premiums for those who consistently pay their mortgages on time for three years. After five years of timely payments, the FHA would be required to reduce premiums.

"Any bill must continue to price for additional risk. That's how any successful company operates -- more risk, higher cost. Just like an 18-year-old gets charged higher insurance than his dad," Montgomery said.

The Senate FHA bill takes a different path, placing a one-year moratorium on the implementation of risk-based FHA premiums.

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For additional information, please contact Shelley Mitchell, smitchell@nehemiahcorp.org, 916-231-1999.

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