New FHA ceiling means the program could be serving near $1M home buys

While the Federal Housing Administration loan limits rose in tandem with the recently announced conforming limits, attitudes about whether those are now too high have changed with the shift in administrations.

A year ago, then-Federal Housing Commissioner Dana Wade said the high-cost-area ceiling opened the government mortgage insurance program up to serving a market better handled by nonconforming lenders.

The Biden administration’s leadership in the FHA is more supportive of the increase to go into effect for 2022.

"The increase in loan limits, commensurate with the increase in home prices, will allow qualified individuals and families to continue to access FHA-insured mortgages to achieve affordable home financing," Lopa Kolluri, principal deputy assistant secretary for housing and the FHA, said in a press release.

However, following the announcement of increases for the conforming loan limits by the Federal Housing Finance Agency Tuesday, acting head Sandra Thompson, also appointed as part of the Biden administration, seemed to acknowledge that government-related support for more expensive homes could have a negative impact on the accessibility of affordable housing.

"FHFA is actively evaluating the relationship between house price growth and conforming loan limits, particularly as they relate to creating affordable and sustainable homeownership opportunities across all communities," Thompson said.

By law, the FHA floor, the limit that applies to areas of the country where 115% of the median home price is below that level, must be set at 65% of the conforming amount. That sets next year's floor at $420,680. The 2022 base single-unit conforming limit is $647,200.

Any area where the loan limit exceeds the floor is considered a high-cost area, and for 2022 it will be the same as the conforming high-cost ceiling of $970,800. That amount is also now the limit for the Home Equity Conversion Mortgage program.

Special limits apply to forward mortgages from Alaska, Hawaii, Guam and the U.S. Virgin Islands that are higher than for government-sponsored enterprise eligible loans at $1.456 million for a one-unit property.

The U.S. has 3,243 counties or equivalent jurisdictions in all of its states and territories. In 3,188 of those, the FHA limit will rise, while in 45 it will remain unchanged, the agency said. By statute, the median home price for a metropolitan statistical area is based on the county with the highest median home price.

Keefe, Bruyette & Woods analyst Bose George noted since the FHA change is done in tandem with the conforming limit change from the Federal Housing Finance Agency, the increase should keep the agency's share at the same size relative to the overall mortgage market.

In a Nov. 22 report that looks at the mortgage insurance business, George noted that total insurance in force, between the private companies and the government program, grew 2.3% year-over-year at the end of the third quarter. But the PMI IIF grew by 7.9% but FHA's shrunk by 3.6%. The PMI companies, including loans insured by companies in runoff, now have a 54% share while FHA's slipped to 46%.

"The growth gap between PMI and FHA remains much wider than pre-COVID-19 levels," George said. "Ultimately, we expect this growth gap to revert to more normalized levels."

It is likely the Biden administration finally acts on the long-rumored FHA 25 basis point premium cut sometime in the first half of next year, he said. But George also reiterated his past observation that would only move business back to the FHA program at the margins. A reduction in the GSE loan-level price adjustments would also keep business from shifting away from PMI.