By Robert Freedman, Senior Editor, REALTOR® Magazine

The Wall Street Journal in an attention-grabbing half-page article and graphic (“Sellers Brace for New Mortgage Caps”) in its July 6 issue showed just how hard expensive markets in the U.S. would be hit if Congress allows Fannie Mae, Freddie Mac, and FHA loan limits to expire on September 30, the end of the federal fiscal year. Currently, limits are set at $417,000, although for expensive areas they can go up to $729,750. Should the limits be allowed to expire, the limits would drop to $271,050 for FHA and remain at $417,000 for Fannie and Freddie, but for expensive areas, the high-cost limit of $729,750 would drop to $625,500 for Fannie and Freddie as well as for FHA.

The Journal’s graphic is particularly illuminating because it illustrates the problem of expiring mortgage caps as largely a coastal matter, with 80 percent of markets facing the biggest hit in two states: California and Massachusetts. The other 20 percent are scattered largely along the rest of the eastern and western seaboard, the Mountain West, and parts of the Midwest. Virtually no areas would be affected in the country’s heartland.

As far as high-cost loan limits are concerned, that portrayal is surely accurate, and it shows a lot of pain for borrowers in expensive areas like Boston, where federally backed financing (now 90 percent of all loans made) would only be available for loans up to $625,500. That means any house that households want to buy above that price will require more than 3.5 percent down, because FHA won’t be available to them, and will come with a higher interest rate, because Fannie Mae and Freddie Mac won’t be available to them. Especially for first-time buyers, coming up with as much as 20 percent down or paying another 100 basis points or so for financing will be extremely hard. Many buyers simply won’t be able to do it.

The problem with the Journal’s take on the issue is that it doesn’t address what real estate practitioners around the country say is the far bigger problem with expiring loan limits. And that’s a related change in the loan formula to 115 percent of area median home price from 125 percent.  According to a chart put together by Fannie, Freddie, and FHA, this change would mean a decrease in loan limits in 669 counties in 42 states. Only eight states (Ark., Iowa, Kans., , Miss., Neb., N.D., S.D.,  and Okla.) will see no decline because they are already at the FHA floor of $271,050.

That 10 percentage-point drop to 115 percent from 125 percent of area median home price is a huge factor in much of that empty space in the Wall Street Journal’s big graphic, and yet from reading the article, you would never know the formula would undergo this change come September 30. In Hampshire County, W. Va., for example, limits would drop to the $272,050 cap from $475,000. That’s almost $204,000, or 43 percent, less than what’s allowed now. In Hamilton County, Ohio, the drop would be almost $67,000, or about 20 percent, to the $271,050 cap from $337,500. Hamilton County does not appear on the Journal’s map.

Congress set today’s limits shortly after the financial crisis to help stabilize real estate markets. Now, more than two years later, markets remain fragile, and dropping the loan limits in places like Hamilton County, Ohio, and Hampshire County, W. Va., will only make a recovery that much harder to reach — to say nothing of the impact of lower limits on high-cost areas.

It’s important that the Journal is talking about the impact of the looming drop in loan limits. It’s also important that the Journal doesn’t mention the far bigger problem with the loan limits: the gutting of the heartland.

More on expiring loan limits.

Robert Freedman

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