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Can they take it high enough?

By Holden Lewis · Bankrate.com
Friday, November 18, 2011
Posted: 2 pm ET

Both houses of Congress have approved an increase in the maximum size of a  mortgage insured by the Federal Housing Administration, or FHA. The measure now goes to President Barack Obama's desk.

Neither the Obama administration nor congressional Republicans think it's a good idea to re-raise FHA loan limits. But increased limits are likely to be signed into law because they are written into a broader spending bill.

A few years ago, Congress raised mortgage loan limits in high-cost areas to goose home sales. The maximum loan size in the most expensive markets was raised to $729,750 for FHA-insured mortgages as well as for loans backed by Fannie Mae and Freddie Mac. The increase was intended as a temporary measure. On Oct. 1, the loan limits were decreased, to a maximum of $625,500.

The taxpayers ultimately are on the hook for mortgages insured by the FHA as well as for loans backed by Fannie and Freddie. It made sense to decrease those loan limits, to reduce the taxpayers' liability. But Realtors and bankers whined about how the lower loan limits would harm home sales. So Congress, led on Thursday by Democrats, approved raising the FHA limits back to where they were before Oct. 1.

The Wall Street Journal's Alan Zibel reports that Republicans in the House and Senate argued that the loan limit increase "contradicts a goal of both parties to reduce the U.S. government's role in propping up the housing market."

Zibel adds: "Another Republican criticism of the action is that it would primarily benefit affluent neighborhoods." This point was pushed this week by a coalition of right-wing groups such as the Competititve Enterprise Institute and Grover Norquist's Americans for Tax Reform.

When I find myself agreeing with Norquist, I check my temperature to make sure I'm not delirious. Nope, the usual 99 degrees.

If the higher limits become law, then we'll have a situation where affluent homeowners and homebuyers will have a choice between higher-rate jumbo mortgages and lower-rate, taxpayer-backed FHA-insured loans. In turn, there will be less incentive for home sellers to cut prices, at a time when we need lower house prices to stimulate demand.

What do you think? Is it a good idea to re-raise FHA limits? And if so, should Fannie and Freddie re-raise their loan limits, too?

Follow me on Twitter @HoldenL.

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