The Federal Housing Administration is reducing the maximum size of the mortgages it will back, a step already taken by housing finance giants Fannie Mae and Freddie Mac.
As of Jan. 1, the limits for FHA-insured loans in the nation's most expensive areas will be $625,500 for a single-unit dwelling, down from $729,500, except for certain parts of Hawaii, where the caps will be $657,800 to $721,050.
The FHA historically provided insurance on smaller loans so first-time borrowers and people with modest incomes could get mortgages. Its role changed and Congress increased the limits in 2008 during the financial crisis, when home loans not backed by the government dried up.
More recently, banks have been eager to write jumbo mortgages for well-heeled borrowers without government support.
"Implementing lower loan limits is an important and appropriate step as private capital returns to portions of the market," FHA Commissioner Carol Galante said in announcing the change. The policy, she said, "enables FHA to concentrate on those borrowers that are still underserved."
The upper limits are for areas with the highest housing costs, including Los Angeles, Orange and Santa Barbara counties, the San Francisco Bay Area and Silicon Valley. The current limit for areas where housing costs are relatively low will remain unchanged at $271,050.
The limit varies for areas above that floor but below the ceiling. For example, Riverside and San Bernardino counties will top out at $355,350, San Diego County at $546,250 and Ventura County at $598,000.
The FHA's parent, the Department of Housing and Urban Development, posted an online link to the limits in areas across the nation.
The FHA, created during the Great Depression, recently required its first bailout by taxpayers. It also has raised the fees it charges to insure loans.