Senate Hikes FHA Loan Cap in High-Cost Areas

The Senate on Tuesday approved an increase in the FHA loan ceiling for high-cost areas from $101,250 to $125,000 in a compromise move to provide some help to home buyers in such places as Southern California and metropolitan New York.

Responding to objections by the Bush Administration and lawmakers from rural states, however, the Senate refused to eliminate the ceiling and to base Federal Housing Administration lending limits on median statewide or areawide housing costs. That proposal, from the Appropriations Committee, would have allowed the FHA to make loans up to $153,900 in California and up to $189,000 in the New York region.

Sen. Don Nickles (D-Okla.) argued successfully that a ceiling based on housing costs could raise the FHA’s liability and expose the government agency to increased defaults. The Senate rejected his proposal for a $118,000 ceiling for high-cost areas but when he tried again with a cap of $125,000, it sailed through on a voice vote.

Under present law, FHA loans for residential housing are limited to 95% of the median price in an area, subject to an overall national ceiling of $67,500 except for high-cost areas. In those areas there is the special ceiling of $101,250.

Sen. Alan Cranston (D-Calif.) argued that real estate prices in California are so high--with a median cost of $153,900 for a single-family home--that the FHA has been “simply knocked out of the market.”

The 5% down payment allowed by FHA, he said, is a strong incentive for first-time home buyers who may have good incomes but lack the funds to put down the higher amounts required with a conventional mortgage loan.

‘Help the Rich’

“The FHA will be stronger under this proposal because of better credit risks it will be insuring,” Cranston argued.

Nickles, however, said that the FHA is already losing money--$500 million in 1988--and that it cannot afford to take even greater risks. Senate Minority Leader Bob Dole (R-Kan.) sided with Nickles, contending that FHA loan defaults are at the $2-billion level already.

Proponents of the higher FHA ceilings, Dole said, are “reaching out to help the rich” buy expensive homes.

The measure approved Tuesday is part of a $67.2-billion measure pending before the Senate that will finance federal housing, veterans, space and environmental programs for fiscal 1990, which begins Oct. 1. If the bill passes, it would be considered by a Senate-House conference committee.