Washington—Senator Dianne Feinstein (D-Calif.) this week joined Sens. Robert Menendez (D-N.J.) and Johnny Isakson (R-Ga.) in introducing a bipartisan bill—the Homeownership Affordability Act of 2011–that will allow the Federal Housing Administration (FHA), Government Sponsored Enterprises (GSE) and the Veterans Administration (VA) to insure home loans at their current maximum levels for an additional two years, until December 31, 2013.        

In 2008, to aid the weak housing market, Congress increased the maximum loan limit for the FHA, GSEs and the VA to 125 percent of local median home prices. Those limits, if allowed to expire on September 30th for the FHA and GSEs and on December 31st for the VA, could set back the still-weak housing market even further.

“If limits on non-conforming loans drop, California will suffer. The already weak housing market will see further destabilization as thousands of home loans fail to qualify for government funding,” Senator Feinstein said. “California counties would see loan limits for government financing plunge by as much as $246,000, making loans more expensive and harder to come by for many homebuyers. While I recognize the need for comprehensive housing finance reform, California’s housing market is too unstable to make arbitrary decisions that could have detrimental impacts on home values.”

“Allowing these limits to expire would be bad medicine for our economy at a time when we need a booster shot,” said Senator Menendez, who introduced the legislation. “New Jersey has some of the highest home prices in the nation and allowing these limits to lapse would hurt middle class homeowners and prospective buyers. The effects could be terrible.”

“Allowing existing loan limits to expire during this difficult economic time would make a struggling housing market even weaker. I am also concerned that failing to extend these limits will make it even more difficult for the average homebuyer get a mortgage and buy a home when credit is already tight,” said Senator Isakson. “I am pleased to join my colleagues in supporting the Homeownership Affordability Act because it is critical for the recovery of the housing market, which is the foundation of our economy.”

The effects of an expiration could be dramatic—access to mortgage credit will be significantly impeded for many homeowners and buyers across the country. If the limits are not extended, they would be automatically lowered in 669 counties across 42 states and the average decline in loan limits would be more than $68,000 per county. The current limits are $729,750 or 125 percent of local median home prices for single family residences across the country, but will drop back down to $625,500 or 115 percent of local median home prices if the extension is not passed.

The Homeownership Affordability Act of 2011 is paid for by increasing the guarantee fees charged on the loans themselves. Guarantee fees, or “g-fees,” are charged by loan guarantors such as the GSE’s to lenders for bundling, servicing and selling the mortgage-backed securities to investors and are similar to insurance. Additionally, FHA audits for the past decade have shown that larger loans actually perform better and default at significantly lower rates than small loans, so allowing these larger loans to be insured would actually improve taxpayer returns.

Supporters include the National Association of Realtors, the Mortgage Bankers Association and the National Association of Homebuilders. Several bills have also been introduced in the House of Representatives to maintain the higher loan limits.

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