Bill to Raise FHA Limit Could Aid State
In 1961, Jack Kemp, then quarterback of the San Diego Chargers and now secretary of Housing and Urban Development, bought his first home with a mortgage insured by the Federal Housing Administration.
Today, however, Kemp would be unable to buy that same starter home with an FHA-backed mortgage. The FHA’s mortgage maximum loan amount has not kept pace with the median price of housing, which has soared in expensive markets such as Southern California.
Although the FHA ceiling was raised recently to $124,875, which will allow FHA to write substantially more mortgages in high-cost areas, it will still be far below the median cost in cities such as Los Angeles and San Francisco, and in San Diego, where the median price of a house is $175,600.
Affordable housing has become the newest chicken-in-every-pot issue, and there is considerable support for raising the ceiling again and allowing it to float with the median value in each city.
What seems most popular and most likely to make it into the National Affordable Housing Act is a bill sponsored by Sens. Alan Cranston (D-Calif.) and Alphonse D’Amato (R-N.Y.), which would set a new ceiling at 95% of the median value of housing within a particular metropolitan area. The ceiling could not exceed 90% of the state median.
Prices are so high in some markets, Cranston argued before the Senate voted to increase the limit last September, that the FHA was “simply knocked out of the market.”
Interestingly, there is no historical precedent for keeping the FHA limit below the median value of housing in any particular area.
In fact, in the mid-1960s the loan limit was 70% above the median sales price of existing homes, providing FHA coverage for all but the most expensive homes. It wasn’t until the mid-1980s that the ceiling dropped below the median. Even at 95%, the program will still be restricted to housing in the lower half.
All the players are taking sides on the issues of whether to raise the ceiling once more.
The realtors, home builders and mortgage bankers, backed by Cranston and other congressmen, lined up against the private mortgage insurance industry and the savings and loans, which are backed by Sens. Don Nickles (R-Okla.) and Jesse Helms (R-N.C.), who fought even the new $124,875-ceiling, calling it a “fat-cat provision.”
Some consumer advocacy groups also have voiced concerns that raising the limit could contribute to the national housing affordability problem.
The FHA was created by Congress in 1934 to make housing opportunities available at a time when the whole housing finance system was in disarray.
Prior to FHA, home buyers had to make substantial down payments and finance their purchases with short-term balloon loans. The FHA was the creator of the long-term, amortized mortgage that we still use in one form or another today.
John M. Ols Jr., director of housing and community development issues for the Government Accounting Office, told the House subcommittee on housing and community development that the purpose of FHA “is to encourage improvement in housing standards and conditions, provide an adequate home financing system through mortgage insurance and exert a stabilizing influence on the mortgage market.”
To make it all work, the FHA, decades ago, set up its own self-sustaining mortgage insurance fund to insure loans for single-family homes.
A recent GAO audit painted a dire picture of the FHA’s present and future. In fiscal year 1988, the single-family insurance fund, which constitutes the bulk of FHA activity, lost $1.4 billion, leaving just $1.8 billion in reserve.
The FHA, which has insured mortgages for 17 million people since its inception, is in for some changes. Those changes could be in down payment requirements or in loan-to-value ratios. A permanent change in the allowable loan ceiling is almost a certainty.
A big fight is brewing over which direction FHA should take.
Mark E. Goldhaber, vice president of General Electric Mortgage Insurance Cos., a private mortgage insurer, said, “From our industry’s point of view, the 95% plan will take a large segment of the market that is already being served by the private sector and federalize it. Who are we trying to serve with the FHA? Raising the limit, whether in Los Angeles or Boston, doesn’t help the family of four making $50,000 a year afford a house. That family still cannot afford a median-priced house of $200,000.”
The Mortgage Insurance Cos. of America (MICA) has released a study saying that mortgages of more than $80,000 actually are riskier than lower mortgages, and the FHA would be exposing itself to even greater risk of loss by increasing its limit.
“If that’s the case, why don’t they differentiate in their fees?” asked Ols in an interview, noting that PMI companies do not charge higher insurance premiums for the higher, and supposedly riskier, loans. MICA’s numbers conflict directly with the findings of the GAO, which showed that higher mortgages have “slightly lower default rates and . . . lower percentage losses when they default.”
The PMI companies, said Kent Colton, executive vice president of the National Assn. of Home Builders, “don’t want the competition from FHA. The person who will lose if they succeed is the consumer.
“It’s a clear mistake to eliminate the FHA as a player in markets like California. It is clearly discriminatory.”
The National Assn. of Realtors supports the 95% proposal.
NAR senior vice president Stephen Dreisler said, “Everything in life tends to be relative. And a median-priced house in Los Angeles ought to be eligible for FHA financing just like a median-priced house in Louisville, Ky. A fireman in Los Angeles ought to be able to buy a house using FHA just as his counterpart in Louisville does.”
Cranston’s chief housing aide, Donald Campbell, explained the proposal for the 95% limit: “What we are trying to do is to provide some more equity across the country, so that modest homes in all areas are covered by FHA.”
Allowing the FHA to insure loans up to 95% of the median value in any metropolitan area, up to 90% of that particular state’s median value, will strengthen the FHA fund, Campbell argued, saying it makes sense in the insurance industry that spreading business across a number of markets reduces risks.
Based on the FHA’s experience with its own higher-end mortgages, the GAO study says that a higher ceiling would expand FHA’s market and probably increase the equity in the single-family fund substantially.
“We have to recognize that raising the ceiling strengthens the fund by lowering the risk of the total portfolio,” Campbell said. “There are two ways to do this: one is to expand the market to lower risk borrowers; the other is to stop serving the high-risk borrowers.
“The only other option,” Campbell joked, “is to start pumping in taxpayer money.”
In 55 years, FHA has never gone hat in hand to the taxpayer; any losses on foreclosed property has been offset by premium income.
NEW COLUMN
“America’s Housing,” a monthly report from Washington, D.C., begins today in the Real Estate section. The column, written by journalist and author Catherine Collins, will cover national developments in residential real estate that affect Southern Californians.
