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Originally published July 9, 2011 at 11:20 AM | Page modified July 9, 2011 at 9:48 PM

New federal home-loan caps hit Kitsap County hardest

Local real-estate agents and mortgage lenders fear a pending drop in FHA, Fannie Mae and Freddie Mac home-loan limits will harm an already-weak Puget Sound housing market and potentially unravel pending deals.

Seattle Times staff reporters

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Local real-estate agents and mortgage lenders fear a drop in federal home-loan limits starting Oct. 1 will harm an already-weak Puget Sound area housing market and potentially unravel pending deals.

Three years ago, to stimulate the economy, Congress temporarily expanded the maximum home-loan amounts backed by federal guarantees. Those limits expire Sept. 30, and new, lower limits go into effect for pricey housing markets in some 250 counties, including many in California and the Pacific Northwest.

Sixteen counties in Washington state are affected by the changes. Among those facing the biggest drops is Kitsap County, where the limit for Federal Housing Administration (FHA) loans on single-family homes will fall by more than 35 percent, from $475,000 to $307,050.

By contrast, in King, Snohomish and Pierce counties, the limit for FHA, Fannie Mae and Freddie Mac loans will decline by just under 11 percent, from $567,500 to $506,000.

"To be hit with this is like being hit in the face with a wet dishrag," said Penny McLaughlin, a spokeswoman for the Kitsap County Association of Realtors. "Sales have not been great, but this is really going to put us under."

By one measure of the potential impact, Washington ranks fifth among the states, according to the Federal Housing Finance Agency. If the lower limits had applied to loans made last year, Fannie Mae and Freddie Mac would have backed 2,276 fewer loans worth some $1.25 billion in Washington state.

Still, that's a small fraction of the federally backed mortgages made in Washington state. Last year, Fannie Mae and Freddie Mac backed more than 114,000 single-family home mortgages totaling $25 billion, while the FHA endorsed more than 39,600 single-family mortgages totaling $9.2 billion.

Unless Congress extends the current limits, mortgage lenders say buyers of Seattle-area homes costing more than $506,000 may have fewer financing options available.

John Porter, vice president of Mortgage Master Service in Kent, said he expects to see community banks hold mortgages above the new limit on their books, instead of selling them to Fannie or Freddie.

But community banks aren't big enough to absorb Seattle's market demand for those loans, he said.

"They just aren't going to be able to do enough volume to help all the high-end borrowers that will be lacking financing options," Porter said.

Others view the pullback in federal home-loan guarantees as a return to normal after an era of heavy home-lending and looser underwriting standards.

"They're trying to take these programs back to their historic foundation," said Glenn Crellin, director of the Washington Center for Real Estate Research at Washington State University in Pullman.

"Does this mean there are a number of buyers who aren't going to be able to use loans they had been using the last few years? Absolutely. ... There is going to be an element of shock out there."

Rich Bennion, residential lending director of HomeStreet Bank in Seattle, said homebuyers still benefit from low interest rates and, by historical standards, generous credit terms.

"It's not like this is a big take-away from something that has been around for generations," he said. "It's a small step in a direction leading back to the norm."

Sanjay Bhatt: 206-464-3103 or sbhatt@seattletimes.com

Christine Harvey: 206-464-3263 or charvey@seattletimes.com

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