About one-fifth of the nation's counties are scheduled to see lower loan limits on FHA mortgages beginning Oct. 1, according to an analysis the U.S. Department of Housing and Urban Development (HUD).

That's when a temporary increase in FHA loan limits, enacted by Congress three years ago, is due to expire. About 670 of the nation's more than 3,300 counties and county equivalents will be affected by the change, many of them in some of the nation's most populated areas.

In some areas, the impact will be severe. Many counties will see a decline of more than $100,000 in the maximum loan amount available through an FHA mortgage to homebuyers there.

East, west coasts most affected

Much of the impact will be concentrated along the nation's east and west coasts, with most California counties seeing loan limit reductions in excess of $100,000, and big drops also seen along the Northeast coast from Washington, D.C. to Maine, and along the Florida peninsula. Other states seeing significant declines include Arizona, Colorado, Utah, Oregon and Washington.

According to HUD calculations, 3 percent of all 2010 mortgages would not have qualified under the new rules, representing 6 percent of the total dollar volume.

Congress temporarily raised FHA loan limits in early 2008 in response to the economic downturn and growing housing crisis. It's renewed them every year since but is not expected to do so this year amid calls from conservatives for shrinking the government's role in the housing and mortgage markets.

Under the new rules, the maximum FHA loan limit for any county will be $625,000, down from $729,750 currently. The minimum loan limit will remain at $271,050.

Impacts will be uneven

The impacts of the change will be uneven, with reductions not necessarily related to the amount of a county's current loan limits. For example, Colorado's San Miguel County will see a reduction of only $25,750 in its FHA loan limits, to the new maximum of $625,500. Meanwhile, Merced County, Calif. will see its FHA loan limits whacked by more than $200,000 - to the minimum $271,050, despite having a current loan limit of $472,500.

The reason for the disparity is that some areas have seen steeper price declines than others. Under both sets of rules, median home prices are used to calculate FHA loan limits for each county. However, under the current rules, counties are still allowed to use pricing data from 2007, prior to the worst of the crash. The new rules require counties to use pricing data from no earlier than 2008, by which time many had seen significant declines.

The new loan limits will not affect FHA streamline refinances, which will be grandfathered in for loans originated before Oct.1, 2011. Nor will they affect FHA reverse mortgages (Home Equity Conversion Loans), which were established under a different legislative authority, although new limits are under consideration.

Published on May 28, 2011