CRS Examines Housing Provisions in House Stimulus Bill

H.R. 5140 would grant the Federal Housing Administration (FHA) temporary authority to insure mortgages in high-cost areas up to this $729,750 limit. The authority would expire December 31, 2008. Currently the FHA limit ranges from $200,160 to $362,790 in high-cost areas.² The Secretary of the Department of Housing and Urban Development (HUD) would be required to publish the increased GSE and FHA limits.

Many of those supporting the increases believe they would provide a needed stimulus to housing and mortgage markets.³ The immediate impact of the changes affecting Fannie Mae and Freddie Mac, however, is unclear. The Office of Federal Housing Enterprise Oversight (OFHEO), an independent office within HUD, which oversees the safety and soundness of the GSEs, has announced that it is "disappointed" that increasing the limit was not part of general regulatory reform, and that the GSEs should subject the higher priced mortgages to rigorous new product development, risk management, and capital reserves requirements.⁴ This suggests that HUD might require the GSEs to submit their plan to purchase the larger mortgages for regulatory review.⁵ Unlike the GSEs, FHA (part of HUD) is not under independent regulatory authority.

Given implementation delays and the limited lives of the programs, it is not clear how much use the GSEs or FHA would make of their temporary authority. As stockholder-owned companies, the GSEs would balance their fiduciary responsibility to earn profits with the requirements in their congressional charters to assist housing markets. FHA would probably consider the risk to the financial soundness of their insurance fund against temporary assistance to parts of the housing market.

Other factors tending to limit the impact of the increased mortgage limits are as follows:

• Existing loan-to-value limits would continue to apply. This would prevent homeowners who owe more on a house than its appraised value from participating in the program. For conforming loans using a standard 5% downpayment, this would affect homes worth $438,900 to $768,000 and for FHA loans with a 3% downpayment this would allow the purchase of homes worth $351,900 to $752,000.

• Existing credit worthiness and debt-to-income requirements would apply. This would prevent those not current on their mortgage from refinancing.

• The GSEs' retained portfolios currently are close to the maximum amount that they can hold without raising additional capital. They could, however, follow the sense of Congress suggestion in H.R. 5140 to buy these mortgages, add their guarantees, package them into mortgagebacked securities (MBS), and sell the MBS to large investors.

• help purchasers of homes above the current loan limits and below the temporarily higher ones who have good credit;

• mostly help home buyers in high cost areas, such as California, New York City and its suburbs, the Boston area, the Seattle area, and the Washington, D.C. area. The monthly principal and interest payments on a 30-year fixed-rate $600,000 mortgage are likely to fall from $3,824 to $3,377, saving $447 per month.⁶ FHA's guidelines state that mortgage payments, and insurance and taxes should not exceed 29% of monthly income. A combined monthly housing expense of $3,377 would require a minimum annual income of $140,000;

• not count mortgages purchased by the GSEs as a result of the higher loan limit for the purpose of low- and moderate-income housing goals and underserved areas goals. HUD establishes numeric goals based on the Housing and Community Development Act of 1992;⁷ and

• help FHA compete against private sector lenders and possibly open homeownership to borrowers who for one reason or another could not qualify for a conforming mortgage to purchase a more expensive home.

² FHA limits are available from HUD's website at [https://entp.hud.gov/idapp/html/hicost1.cfm].

³ James R. Haggerty and Damian Paletta, "Details Lacking on Mortgage-Relief Plan," Wall Street Journal, January 26, 2008, p. A6.

⁴ James Lockhart, Statement of OFHEO Director James B. Lockhart on Conforming Loan Limit Increase, January 24, 2008, available at [http://www.ofheo.gov/NewsRoom_Print.aspx?ID=410]. See, also, OFHEO, "Potential Implications of Increasing the Conforming Loan Limit in High-Cost Areas," Mortgage Market Note, January 11, 2008. Available at [http://www.ofheo.gov/media/research/MMNOTE11108.pdf].

⁵ The Secretary of the Department of Housing and Urban Development has new program approval authority. See 12 U.S.C. 4542.

⁶ Interest rates are based on mortgage rates reported by Bankrate.Com at [http://www.bankrate.com/brm/graphs/graph_trend.asp?tf=91&ct=Line&prods=1,325&gs=275,250&st=zz&c3d=False&web=brm&cc=1&prodtype=M&bgcolor=&topgap=&bottomgap=&rightgap=&leftgap=&seriescolor=]. The jumbo loan interest rate used in this calculation is 6.58% and the conforming loan interest rate is 5.42%.

⁷ 12 U.S.C. 4562-4564 and 4566.

⁸ Representative Barney Frank introduced H.R. 1427, the Federal Housing Finance Reform Act of 2007, on March 9, 2007. The five cosponsors were from both parties. Senator Schumer introduced S. 2036 without cosponsors; it was referred to the Committee on Banking, Housing, and Urban Affairs.