The coming change in the conforming loan limit will have a much larger impact on loans insured by the Federal Housing Administration (FHA) than on those purchased or securitized by either Fannie Mae or Freddie Mac.

According to an analysis by the FHA, loan limits on government insured mortgages are likely to decline in 669 of the 3,334 counties or county equivalents when the ceilings revert back to the levels determined under the Housing and Economic Recovery Act of 2008 (HERA). The shift will take place on Oct. 1 unless Congress intervenes.

That's almost three times as many markets that will be affected when it comes to loans that conform to the limits placed on Fannie/Freddie mortgages. According to an earlier analysis by the Federal Housing Finance Agency (FHFA), only 250 county or county-equivalent areas — a "small fraction" of the total, the FHFA said — will be affected by the pending change.

The FHA analysis shows that its loan limit would fall by more than 5% in eight states — Arizona, California, Colorado, Connecticut, Massachusetts, Maine, New Hampshire and Oregon — as well as the District of Columbia. When evaluated for the potential impact on the number of loans eligible for government insurance, Colorado, Maine and Oregon fall off the list and Nevada and Puerto Rico come on.

A total of 44 Puerto Rican municipalities would feel the greatest pinch, with a projected decline in the FHA loan limit of a whopping $221,000. But that would only impact 4% of those areas' loan count, the FHA analysis says.

Other places would take big hits, too. The limit is projected to fall by $75,200 in Maricopa County, Ariz., from $346,250 to $271,050. In Los Angeles County, the lid would drop $104,250, from $729,750 to $625,500. But in Mendocino and San Joaquin Counties in California, it would sink by $138,750 and $184,000, respectively.

The change could be equally as tough on the East Coast, too. In Monroe County, Fla., for example, the FHA maximum is projected to plunge by $200,500, from $729,750 to $529,000.
Until three years ago, FHA mortgage insurance limits were set at 95% of the median price house price for each particular area. But the maximum could not exceed 87% of the ceiling placed on the GSEs or go lower than 48% of that ceiling.

In February 2008, however, Congress changed the formula in an effort to mitigate the economic downturn by temporarily setting the limit at 125% of the area median but not to exceed 175% of the GSE limit of $417,000.

Five months later, though, lawmakers changed the rules again when they passed the recovery act, this time by assigning the task of setting the conforming loan limit to the newly created FHFA. (In all cases, the ceiling in high cost markets such as Alaska and Hawaii are 150% higher than the conforming loan limit.)

Seven months after passing HERA, Congress enacted the American Recovery and Reinvestment Act, which stipulated that FHA loan limits be set in each area at the higher dollar amount when comparing the ceiling under the stimulus act to the limit calculated for 2009 under HERA.

Since February 2009, the limits have been extended by Congress on an annual basis. And unless lawmakers act to extend them again, they will fall back to the ceilings determined under HERA starting Oct. 1.

Since HERA was put on the books, the FHA has followed a policy of never allowing its ceiling in any market to drop below a previous limit. This practice, according to the FHA, is consistent with the law's policy. And as a result, some maximums are based on the median price of an earlier year.

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