Loan ceiling increased, but will it spur the housing market or simply get the government in deeper?
The new limit allows borrowers in pricey markets seeking loans up to
The limits for Fannie-, Freddie-, and FHA-backed loans were raised when credit markets tightened during the financial crisis, but they automatically reverted to the lower ceiling of
"The issue became, how do we avoid this pitfall and bring stabilization to prices in the housing market," says
Proponents of the increase argue that the housing market is still much too feeble to withstand any obstacles that make it more difficult or expensive to take out a loan. But critics say the measure would primarily benefit affluent neighborhoods, synthetically drive prices higher, and reinforce the government's already giant presence in the housing market.
Nevertheless, most experts agree that reducing the government's footprint in housing and resuscitating the virtually nonexistent private sector's presence is the right direction in the long term. The government-sponsored enterprises Fannie and Freddie are expected to pull back from their involvement in the housing market in the near term, but because the housing market remains so weak, there will be a void to fill.
"What you're going to see is FHA having to step up to fill that void," Findlay says. "If I'm somebody in that bucket between
The concern, again, is that FHA's market share will balloon, further entrenching the government in the housing market.
Another unintended consequence of the higher loan limits is more borrowers with high-dollar loans with very little "skin in the game." FHA-backed loans only require a 3.5 percent down payment. "FHA levels were restored to their previous levels, but GSE levels were not," says
As the tug of war continues between reducing the government's footprint in housing and ensuring the market can stand on its own, the ultimate outcome of raising FHA loan limits remains unclear. A recent audit raised concerns about FHA's financial situation and found the agency's cash reserves alarmingly low.
"If I look at it from the standpoint of a homebuyer, it's great for them," Findlay says. "If I look at it from the standpoint of our economy and the long-term sustainability, maybe it's not good [in the long term] but it's OK for now."
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