FHA and others are lifting limits on mortgages

A sizable increase in key mortgage limits announced Thursday may deliver a big dose of first aid to the sluggish Puget Sound housing market.

Fannie Mae and Freddie Mac, the quasi-governmental companies that underwrite the majority of the nation's home loans, are now offering mortgages up to $567,500 in King, Pierce and Snohomish counties.

That's up from $417,000, and means buyers of pricier homes will no longer be dependent on jumbo loans, which carry higher interest rates and increase buyers' house payments.

Concurrently, the U.S. Department of Housing and Urban Development announced the same loan ceiling for its FHA loans, replacing the previous limit of $362,790 for mortgages in the tri-county area. FHA loans have less-stringent borrower qualifications than many other mortgages and generally lower interest rates.

This makes them a potential lifeline for credit-impaired homeowners who need to refinance out of unaffordable, adjustable-rate subprime loans.

"I absolutely believe this increase in the limits will really present an opportunity for homebuyers that was not there before, either to enter the market or to refinance out of a loan they don't want," said Rich Bennion, executive vice president and residential-lending director of Seattle-based HomeStreet Bank.

He noted FHA loans require only a 3 percent down payment, less than other loan products commonly require. They, as well as Freddie Mac and Fannie Mae loans, are fixed-rate.

The increases are a result of the economic-stimulus package recently passed by Congress. It allows loan-limit increases in more than 300 high-cost areas around the country, including parts of California, Hawaii, Alaska, Massachusetts and New York.

Prices big hurdle

The high price of King County homes, in particular, has presented an obstacle to Puget Sound-area buyers searching for affordable loans.

The current median price of the county's single-family home, $429,900, exceeded both conventional Fannie Mae, Freddie Mac and FHA loan limits until Thursday's action.

That forced buyers of pricier homes who wanted those loans to have a very large down payment (Fannie Mae typically requires at least 5 percent of the purchase price) or to find a different, more expensive type of loan.

Until now, for example, buyers of a $550,000 home had to have at least a $131,000 down payment to get the loan amount down to Fannie's or Freddie's maximum. The alternative, a jumbo loan, allowed for less down but had higher-than-average costs, which made it unaffordable to some borrowers.

To get an FHA loan, they formerly needed to put even more down, $187,210 on that same house to get down to the FHA maximum.

But the reality was, many buyers ignored FHA altogether because its previous $362,790 loan limit was insufficient to finance more than half the county's house sales.

With limits now at $567,500, those issues have disappeared for a lot of homebuyers.

"It definitely is going to be a stimulus to the market," said J. Lennox Scott, chairman and CEO of Bellevue-based John L. Scott Real Estate. "By raising the loan limits, it deepens the opportunity for more homes to be able to be purchased at more competitive rates. And it allows buyers to be able to reach up and purchase a higher-priced home."

It could also bring new stability to the mortgage market.

Joe Bates, HUD's chief West Coast official, watched the growth in subprime loans with frustration.

"I think the competition among subprime lenders got so hard, they got reckless and people found themselves in risky loan products," Bates said. "We've seen it happen and we've seen our inability because of our mortgage limits to be able to provide a viable alternative.

"It was extremely frustrating to me. So this change is wonderful and something that's sorely needed."

FHA mortgages aren't as volatile as the now-defunct subprimes because they're backed by the federal government. In addition, FHA borrowers who run into financial trouble are guaranteed to get counseling, something subprimes didn't offer.

Officially, the loan-limit increase is temporary and will expire at the end of 2008 unless Congress approves legislation making it permanent. That legislation, part of the FHA Modernization bill, is awaiting final approval on Capitol Hill.

FHA loans, as well as those financed by Fannie Mae and Freddie Mac, are available at banks, credit unions and mortgage companies.

The new loan limits were enacted the same day the Mortgage Bankers Association, in a quarterly look at the mortgage market, said the proportion of all mortgages nationwide that fell into foreclosure shot up to a record 0.83 percent in the October-to-December quarter. That beat the previous high of 0.78 percent, in the prior quarter.

"Clearly it's the worst it's been," chief association economist Doug Duncan told The Associated Press.

In Washington state, the foreclosure rate for the quarter was 0.38 percent.

The report also showed that more homeowners nationwide fell behind on their mortgage payments, which are considered delinquent if they are 30 or more days past due.

The delinquency rate for all mortgages climbed to 5.82 percent in the fourth quarter. That was up from 5.59 percent in the third quarter and was the highest since 1985.

The delinquency rate for Washington state was much lower, with just 3.23 percent of mortgages past due. (Numbers for specific counties were not available.)

Subprime pain

Nationwide, homeowners with tarnished credit who have subprime adjustable-rate loans were the hardest-hit. Foreclosures and late payments for these borrowers also swelled to all-time highs in the fourth quarter.

The percentage of subprime adjustable-rate mortgages that entered the foreclosure process soared to a record 5.29 percent in the fourth quarter. That was up from 4.72 percent in the prior quarter, the previous high.

At the same time, 2.9 percent of Washingtonians with subprime adjustable-rate loans entered foreclosure. This type of loan represents a fraction of the mortgages in the state.

There are a total 65,155 subprime adjustable-rate loans on the books in Washington, compared with about 1 million prime loans, the Mortgage Bankers Association reported.

Nationally, late payments by people with subprime adjustable-rate loans skyrocketed to a record high of 20.02 percent in the fourth quarter, up from 18.81 percent — the previous high — in the third quarter.

California and Florida continued to represent a disproportionate share of the country's new foreclosures. The two states accounted for 30 percent of mortgages starting the foreclosure process, the association said.

"In states like California, Florida, Nevada and Arizona, overbuilding of new homes created a surplus that will take some time to work through," Duncan said. That glut has chopped house prices, he said.

Elizabeth Rhodes: erhodes@seattletimes.com. The Associated Press reported the national mortgage foreclosure information.