FHA reduces guarantee amount on Chicago area mortgages

story from Chicagobusiness.com

Home loan setback

A key support for mortgage lending just shrank, dealing a new blow to the moribund housing market.

As of Jan. 1, the Federal Housing Administration reduced the amount it will guarantee on mortgages in the Chicago area to $365,700 from $417,000. FHA-backed mortgages filled part of the gap left by private lenders retreating from the mortgage market as housing values plunged.

FHA loans accounted for about 30% of weekly mortgage applications nationwide during the last half of 2008, vs. about 10% during the same period in 2007, according to the Washington, D.C.-based Mortgage Bankers Assn.

Homes priced between $380,000 and $450,000 will no longer qualify for FHA guarantees, affecting neighborhoods across metropolitan Chicago, from northwest suburban Arlington Heights to Oak Park in the western suburbs to parts of Chicago's North Side. Sellers in that price range will face more pressure to cut their asking prices, exacerbating the decline in home values throughout the region.

"We need every possible tool we can use to bring first-time buyers into the market," says Kathe Doremus, senior mortgage loan consultant with Community Bank-Wheaton/Glen Ellyn, who says at least 70% of the mortgage loans her bank makes in the western suburbs are now FHA-backed. "All we have left is FHA, and we need every piece of it we can get."

FHA loan limits are dropping in cities across the country as home prices fall. The limit for each metropolitan area is based on prevailing market prices in that city. In the Chicago area, the median home price fell to $207,745 in November, a 16% drop from November 2007.

Lower FHA limits will squeeze sellers in many local communities. In Arlington Heights, for example, 63 of 134 homes on the market at prices between $350,000 and $450,000 will lose access to FHA backing, according to the Illinois Assn. of Mortgage Professionals.

Jorge Gomez, president of the association and a mortgage broker on the Northwest Side, estimates that 50% to 60% of mortgages he handled last year were FHA-backed last year, up from less than 10% in 2007. He worries that home sellers looking to expand the pool of potential buyers will lower prices to meet the new FHA threshold, establishing pricing benchmarks that will force values down for everyone. He says many of the homes in the Old Irving Park neighborhood where he lives are in the price range that has been affected.

"You're depressing an entire neighborhood now," he says.

All but ignored during the housing boom, FHA loans are popular now because they allow borrowers to make small down payments — as low as 3.5% of a home's value. Other lenders, including those offering mortgages backed by federal loan agencies Fannie Mae and Freddie Mac, require at least 5% down.

And, for some home types such as condominiums, mortgage insurance is particularly hard to get without an FHA guarantee. The lower limit will put a major damper on sales of affected condos, real estate professionals say.

"If we could just get some continuity (in lending) and get the ball rolling, I think we'd be OK," says David Hanna, president of the Chicagoland Assn. of Realtors. "This (FHA change) is just not going to help."