The government recently passed a bill that extended the agency's conforming loan limit to $729,750 in the country's most expensive neighborhoods, while keeping Fannie Mae and Freddie Mac's ceiling at $625,500, the level to which it fell after Congress allowed a previous $729,750 loan limit to expire on Oct. 1. This probably means that relatively well-off homebuyers will increasingly turn to the FHA in order to help finance mortgages in high-cost areas, concludes columnist Kenneth R. Harney.
The decision by Congress to raise loan limits solely for FHA-insured loans, and not for Fannie Mae or Freddie Mac-backed loans, reflects the government's growing displeasure with the two mortgage giants (which back roughly half of all mortgages in the U.S.) and its desire to reduce their role in the housing market.
Unlike Fannie Mae and Freddie Mac, the "FHA has never encountered any ingrained hostility from lawmakers," Jack Guttentag, professor of finance emeritus at the Wharton School, told AOL Real Estate.
What has probably saved the agency from Congressional disapproval is that it never waded into the toxic waters of the subprime mortgage market. While Fannie Mae and Freddie Mac bought up loads of toxic mortgage-backed securities, the FHA only insured loans that met its staid standards (which were relatively high compared to loans that some subprime lenders were making).
As a result, the FHA has not required any taxpayer assistance, even as Fannie Mae and Freddie Mac continue to run up a bailout tab that so far has exceeded $100 billion.
The FHA was formed in 1934 to revive the Depression-ravaged housing market by insuring loans for banks. Until now, the FHA has insured the loans of mostly low-income homebuyers and over the years has continually met the expectations of Congress, "which was always: Provide financial help to lower income people," Guttentag said.
But the FHA's recently extended loan limits allow the agency to insure loans that run as high as 125 percent of a market's median home-sale price, while Fannie Mae and Freddie Mac may only back mortgages that run up to 115 percent of the median home-sale price. That means the FHA may continue to break from its legacy and finance more higher-income borrowers.
Even though the FHA boasts an encouraging track record of financial stability, recent reports suggest that it too may soon end up costing taxpayers. In fact, prior to receiving the loan limit extension, the FHA already faced nearly a 50 percent chance of needing government assistance, according to The New York Times. The agency's cash reserve is reportedly less than one-quarter of a percentage point of its total assets, even though the agency is legally obligated to keep that number at 2 percent.
Could extending higher conforming loan limits increase the FHA's risk of a bailout?
Not really, Guttentag argues. Since the FHA will use the same loan-to-value ratio requirements for expensive mortgages, and scale insurance rates to loan amounts, the agency won't assume a higher risk of losses.
"The implications for the reserve account are zilch," he said.
Will FHA Be the Go-To Source for High-Cost Mortgages?
In the spirit of Thanksgiving, we thought we'd bring you homes that their eventual owners should be really, really grateful to afford. From an $125 million Bel-Air chateau -- the country's most expensive listing -- to a veritable fortress in New Jersey, these homes are truly some of the most mind-blowing mansions to ever filter the light of day (through ornate skylights of course). Feast your eyes on unmatched residential eye candy. Then, might we suggest, move on to turkey.
Location: Beverly Hills, Calif.
Price: $54.95 million
Sq. Ft.: 6,377
This carriage house, known as "Green Acres," doesn't deliver as many square feet as your typical uber-luxury home. But what it lacks in size, it makes up for with in lush tree-filled surroundings, gorgeous landscaping and extravagant interior. It has staff quarters, a private motor courtyard, eight stables, a guesthouse, pool house and gardens.
Located: Beverly Hills, Calif.
Price: $55 million
Sq. Ft.: 27,163
Though it has an old-world feel, this home has only been around since 2003. Sitting on 2.17 acres of coveted Beverly Hills real estate, the Mediterranean offers a 20-car garage and private tennis courts.
With its spires, this stunning estate resembles a castle more than a colonial (the home's listed style). Offering mountain views, the home is shielded by a ring of trees on its perimeter that also encircles its massive pool and tennis court.
Location: Indian Creek Village, Fla.
Price: $60 million
Sq. Ft.: 30,000
According to the home's listing, this mansion is the most expensive home in Miami. The certified-green home (it's making up for all the carbon dioxide used to build it) boasts light-filtering louvered walls, a gourmet kitchen, a "servant room," and 100-foot resort pool.
Location: Palm Beach, Fla.
Price: $74 million
Sq. Ft.: 27,355
The second-most-expensive house on "billionaires' row" in Palm Beach, Fla., this $74 million mega-mansion shamelessly pursues a level of extravagance matched only by its proletariat-galling inspiration: the French chateau.
The home includes a 4,000-square-foot master suite, eight bedrooms, a French kitchen (with an office for one of your prouder chefs), an art foyer and a 3,000-bottle bar. Pictured here is the home's lavish pavilion.
Location: New York
Price: $90 million
Sq. Ft.: 18,000
Built by retail chain magnate Frank Woolworth, the "Woolworth Mansion" is currently Manhattan's most expensive listing. Behind its limestone facade, this neo-French Renaissance home on Fifth Avenue has a grand foyer, floor-to-ceiling windows, a dining room that can fit 50 guests and an expansive library.
See more about the history of this famous mansion by viewing the listing.
Decorated with extravagant finishes, other highlights include multiple kitchens, offices and fireplaces. There appear to be seven floors in total. Yup.
This unfinished chateau, not-so-discreetly-nicknamed Versailles, boasts an outrageous 90,000 square feet -- well, when it's completed it will -- and sits on 10 waterfront acres of a gated community. The massive project includes plans for 10 kitchens... What?
Moving on, there are also 13 bedrooms and 23 bathrooms along with a 20-car garage, a bowling alley and an indoor roller rink.
A previous AOL Real Estate item on the home tells us that the mansion is the brainchild of real estate tycoon David Siegel, owner of the largest privately held time-share company in America. Siegel froze construction on the home when his company, Westgate, began to suffer in the economic downturn.
Location: Bel Air, Calif.
Price: $125 million
Sq. Ft.: N/A (but probably more than enough)
Topping our list, is this chateau-style estate that sits on four palatially-landscaped acres in the Bel-Air district of Los Angeles. The gated home offers a giant pool, 12 bedrooms, 15 bathrooms and exquisite interior details.