From the wsj.com – unfortunately there is no commentary about the expected effect on the market. Around here I’m guessing that the effect of a lower Fannie/Freddie/FHA loan limit at a higher monthly cost might diminish the competition slightly, but doubt the sellers will waiver:
The FHA currently can insure loans of up to $729,750 in high-cost markets, but the Obama administration recently recommended that those higher limits, which vary by market, expire in October. That would push the top limit down to $625,500, shrinking the pool of eligible properties. And those limits may be reduced even further.
Meanwhile, on April 18, the annual mortgage-insurance premium on new FHA loans is set to rise by a quarter of a percentage point on 30- and 15-year mortgages, a move that will “bolster the FHA’s capital reserves and help private capital return to the housing market,” says David H. Stevens, the FHA’s commissioner, in a news release. That change will mean an average increase of $30 to a borrower’s payment each month.
There could be more changes on the way, too. “A lot of people think it’s just a matter of time before they increase the down payment from 3.5% to 5%,” says Guy Cecala, publisher of Inside Mortgage Finance.
U.S. Department of Housing and Urban Development spokesman Lemar Wooley says there are no plans under way to increase the down-payment requirement, a move that would require Congressional approval. But, he adds, some members of Congress have suggested the increase.
“It’s tough for the government to be saying, ‘We want to help underwater borrowers; we think there should be principal forgiveness.’ At the same time, they are creating a whole new wave of underwater borrowers by offering 3.5% [down-payment mortgages],” Mr. Cecala says. If borrowers put 3.5% down on a mortgage and home prices fall by 5% over their first year in the home, they’re already underwater, he says.
On an FHA mortgage, borrowers pay a 1% upfront premium that can be rolled into the loan amount, says Scott Sheldon, a loan officer for First California Mortgage in Petaluma, Calif. Borrowers also pay an annual premium, spread out over monthly payments. Those with a 3.5% down payment now pay a 0.9% annual premium, but that will go up to 1.15% in April, he says.
Borrowers don’t face those costs on a conforming mortgage with 20% down.
But Mr. Sheldon says some borrowers are going the FHA route regardless of the costs — even those who can afford a larger down payment — because they’d rather keep their cash liquid and invest it in other ways. FHA mortgages now make up about 75% of his business; a few years ago, he wasn’t doing any FHA loans.
The desire for low-down-payment mortgages is so attractive for some Americans that higher FHA monthly premiums might not have much of an effect on demand. “There’s very strong use by first-time home buyers, who are most challenged in coming up with a down payment,” Mr. Cecala says. “That’s not going to change even with the higher fees.”
According to the Mortgage Bankers Association, 75% to 80% of FHA purchase loans are for first-time home buyers, says Michael Fratantoni, vice president of research and economics for the MBA.