Government Handcuffs Real Estate Investors

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Leave it to the government to take a crippled housing market (which they helped destroy) and make it worse by prolonging its recovery.

Regulators have taken a loose and passive role watching the housing bubble inflate.  Now, true to their nature, regulators are making the problem worse with their slow response and lack of real-world solutions.

, in my opinion, have been unfairly squeezed by the ever tightening underwriting guidelines.  We are dealing with larger down payments, higher credit scores, larger cash reserves, and lower debt-to-income ratios.

As a , Fannie Mae and Freddie Mac require you to have a bullet proof credit profile to even be considered for financing. When you consider that investors put up a larger down payment than most home buyers, require better credit, and typically research and with a cash-on-cash return, lenders and regulators should be more willing to finance these solid transactions. They would also help solve the housing crisis by reducing the excess foreclosure inventory sought by rehabbers and wholesalers.

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Mortgage Loan Limits for Conventional, FHA and VA

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The mortgage loan limits and policies established in 2008 and 2009 will continue through 2010.

There are several types of mortgage loan limits. Generally, most borrowers need to look at conventional, FHA and VA loan limits to see how much can be financed with the most-widely originated loans.

If you borrow at or below the conventional loan limit for non-government mortgages, you would have what is generally known as a “conforming” loan. If the amount borrowed is above the conventional loan limit, you would have a “jumbo” loan and face a higher rate because larger loans imply more risk to , the folks who buy mortgages.

Conventional Loans

For 2010 the conventional loan limits depend on the county where you’re located. Instead of one national mortgage limit, we now have one for each county – and there are more than 3,200 counties.

In general terms, 2010 loan limits for a single-family home range from $417,000 to $729,750. Once you know the loan limit for a single-family home in a specific area you can then see the limits for owner-occupied homes with two to four units.

 

Example #1: Basic Loan Limits

One Unit – $417,000
Two Unit – $533,850
Three Unit – $645,300
Four Unit – $801,950

Example #2: Loan Limits for Certain High-Cost Areas

One Unit – $729,750
Two Unit – $934,200
Three Unit – $1,129,250
Four Unit – $1,403,400

Also, in 2010 there are loan limits for so-called "higher cost" areas. In other words, instead of looking at "counties" you can also look at "areas." These selected areas are located in Arizona, California, Colorado, Connecticut, The District of Columbia, Delaware, Florida, Georgia, Hawaii, Idaho, Massachusetts, Maryland, North Carolina, New Hampshire, New Jersey, New Mexico, Nevada, New York, Ohio, Oregon, Pennsylvania, Rhode Island, Tennessee, Utah, Virginia and West Virginia.

The chart for specific high-cost areas and loan limits can be found at:

Loan Limits for 2009 Mortgage Originations – High-Cost Areas (Remember, the limits for 2010 are the same as 2009.)

FHA Loans

The FHA loan program has loan limits for owner-occupied homes under its 203(b) program, the most-common FHA option. The FHA loan limit varies according to whether you live in a typical real estate market, a “high cost” market or in Alaska, Guam, Hawaii, and the U.S. Virgin Islands.

For 2010 the FHA loan floor for owner-occupied properties look like this:

One Unit – $271,050
Two Unit – $347,000
Three Unit – $419,400
Four Unit – $521,250

For 2010, FHA loan limits in higher-cost areas are as follows:

One Unit – $729,750
Two Unit – $934,200
Three Unit – $1,129,250
Four Unit – $1,403,400

The FHA has special, higher potential loan limits outside the continental U.S. for Alaska, Hawaii, Guam and the Virgin Islands:

One Unit – $1,094,625
Two Unit – $1,401,300
Three Unit – $1,693,875
Four Unit – $2,105,100

To qualify for the FHA loans above, at least one unit must be owner occupied.

HUD has an online database which shows the latest FHA loan limits by state and county. The system can be reached by going to the FHA Loan Limits page.

FHA-Insured Reverse Mortgages

The loan limits for FHA-insured reverse mortgages (also known as home equity conversion mortgages or HECMs) has been set at $625,500.

VA Loans

For 2009 the Department of Veterans Affairs (VA) will use a locality-based approach to establish VA loan limits. Official loan limits for specific areas range from $417,000 to as much as $1,094,625. To find the VA loan limit for a given area, please use the chart below:

2009 VA County Loan Limits for High-Cost Counties

Some important points about financing for vets made by the VA:

  • Vets can purchase homes with one to four units provided that they live in one unit. The veteran must certify as to occupancy.
  • In the case of an active-duty veteran who cannot occupy because of his or her status as an active duty member of the armed forces, occupancy by the spouse can satisfy the occupancy requirement.

A Brief History

Loan limits used to be set annually and the same limit applied to all states and all counties in the lower 48 states. The limits were 50 percent higher outside the continental U.S.

The real estate marketplace began withdrawing from the highs seen in April 2007 and price reductions continued into 2008. Given lower home values, conventional loan limits were supposed to be reduced for 2009. At this point the government stepped in and changed the rules with the Economic Stimulus Act of 2008 (ESA) and the Housing and Economic Recovery Act of 2008 (HERA). These laws gave us the loan limit system we have in place today.

In 2009 a Congressional Continuing Resolution (Public Law Number 111-88) extended the maximum loan limits seen during 2009.

NOTE: Because maximum loan limits can change at anytime, investors are advised to speak with local real estate brokers and lenders for the latest mortgage information BEFORE .

FHA Likely To Be The Next Shoe To Drop

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The FHA is a big reason that home prices haven't fallen even further. The FHA's aggressive lending programs have continued throughout the housing downturn, causing its market share of the mortgage industry to grow from 2% in 2005 to 23% today. The FHA is an even larger percentage of the new home mortgage industry – nearly 25% according to HUD.

The FHA insurance fund, however, is likely running dry. According to a report from mortgage finance experts, the FHA will not meet its minimum requirement as of its fiscal year-end, which is only 26 days from now. For months, we have been investigating this and reporting our findings to our clients.

While almost all of the experts believe that Congress would support the FHA if necessary (it's currently self-funded), we wonder if FHA officials will be under pressure to continue tightening their lending policies, which currently allow 96.5% mortgages to people with 600 FICO scores. Already, FHA has contracted its own standards to require a 10% down payment for those with credit scores below 500.

Claims against the insurance fund have climbed, with roughly 7% of all FHA-insured loans now delinquent.

Given the FHA's September 30 fiscal year-end, this financial reality will come to light about the same time that other market forces run out of steam:

  • Just as the $8,000 tax credit expires.
  • Just as more of the stalled REO currently held on banks' balance sheets will be coming to market.

The culmination of all these factors means housing could see another leg down by early next year. 

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