Hat tip to TW for sending this along, from Bloomberg:

There’s at least one economic policy issue on which Federal Reserve Chairman Ben S. Bernanke, President Barack Obama, and Republican leaders in the U.S. House of Representatives agree: All say it’s time for the federal government to begin scaling back the size of home mortgages it buys or insures.

That’s scheduled to happen on Oct. 1, when limits on loans backed by the Federal Housing Administration and government- controlled mortgage finance companies Fannie Mae and Freddie Mac will drop from the record highs set in the aftermath of the 2008 financial crisis. In high-cost areas, the cap will fall from $729,750 to $625,500. ($546,250 in San Diego County)

Still, even with the political momentum strongly against them, real estate agents and homebuilders are pressing for a last-minute reprieve, setting the stage for a renewed debate on Capitol Hill about whether reducing government backing for loans will destabilize an already weakened market.

“While housing is really struggling to recover, we don’t understand why we continue to put impediments to that recovery in place,” Ron Phipps, president of the National Association of Realtors, said in a telephone interview as he visited Washington last week. “We are going to take this to the 11th hour, or frankly, the 11th hour and the 59th minute.”

The NAR and the National Association of Homebuilders — whose members include Pulte Group Inc., Toll Brothers Inc., and KB Home, among others — have found some lawmakers who agree with their cause. Bipartisan legislation has been introduced in the House and Senate that would extend the current loan limits for two more years. Sponsors of a House bill last week wrote a letter urging fellow lawmakers to add the measure to an upcoming spending bill.

A study this year by the FHA found that if the lower loan limits had already been in effect, only 3 percent of the nearly 1.24 million loans it insured in 2010 and 2 percent of the 284,000 loans it backed in the first four months of 2011 wouldn’t have qualified.  The reductions will affect buyers in 669 counties with relatively high home prices, out of the nation’s 3,334 counties, the FHA found.

“I don’t think FHA was ever intended to help those higher- income individuals buy their homes,” Representative Scott Garrett, a New Jersey Republican and chairman of a House Financial Services panel, said during a hearing last week. “I believe FHA should only be used to help lower-income individuals and first-time homebuyers.”

Federal backing for loans works in a couple of ways. The FHA provides mortgage insurance to some borrowers who otherwise don’t earn enough or have enough of a down payment to qualify for a prime loan. With an FHA loan, buyers can put down as little as 3.5 percent.

In addition, borrowers can get better interest rates if their loan is small enough to qualify for purchase by Fannie Mae and Freddie Mac. The government-sponsored enterprises, which have been under U.S. conservatorship since 2008, package the loans they buy into mortgage-backed securities and sell them.

Loan limits are based on median home prices in each county, but they don’t go any lower than $271,050. That floor will remain unchanged.

Some analysts argue that because home prices have fallen, that floor for government-backed loans is now artificially propping up the market, and should also be dropped.

“Given what has happened to falling home prices, you’re really aggravating the situation,” said Basil Petrou, managing partner of Washington-based Federal Financial Analytics Inc. “It’s a 100 percent government guarantee, with all the problems that generates, applied to a family that can afford a mortgage which is significantly higher than what the average person in their area can afford.”

Researchers at George Washington University released a study in June suggesting that the FHA could reduce its loan limits by 50 percent and still serve 95 percent its target market of low- and moderate-income borrowers.

The problem is that the limits have stayed high while median home values have dropped, said Finance Professor Robert Van Order, one of the authors of the study.  “While property values go down, loan limits of all sorts have gone up,” he said in a telephone interview. “You’ve got a lot of places where the limits reached a peak a few years ago and they’ve stayed there.”

The housing industry is fighting back with predictions that a broad swath of American borrowers will be affected, not just the wealthy, if the limits are lowered.

The National Association of Home Builders released a study by an in-house economist in June that said a reduction in loan limits would make 5 million homes ineligible for government- backed funding and 12.2 million homes ineligible for FHA-insured mortgages.

“I think there’s a misunderstanding that it just impacts a few high-cost states,” said Phipps of the NAR. “The reality is that it’s going to impact 42 states and over 660 individual counties. Its reach is profound.”

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