As loan limits raised, VA left out of loop

WASHINGTON -- Oooops! When Congress and the White House put together the recent bipartisan $150 billion economic stimulus package, they raised the maximum mortgage limits in high-cost areas for Fannie Mae, Freddie Mac and the Federal Housing Administration.

But lawmakers neglected to include a similar increase for the government's primary home purchase program for veterans -- Department of Veterans Affairs-backed loans.

While the limits of the other three programs now extend to $729,500 in the highest-cost areas -- at least through Dec. 31 -- VA loans remain capped at $417,000.

For homebuyers such as Greg Rasnake, a lawyer and disabled veteran who works for the federal government, the $417,000 VA limit is a deal-killer.

He, his wife and children moved to the Washington area a year ago from Oklahoma. They've since been searching for a single-family detached house in the close-in Virginia suburbs, but have been unable to use the VA loan guarantee program because of the $417,000 ceiling.

"There's just no way you can find anything here where that limit comes even close," he said. "You'd think that in a time of war, when you're doing a stimulus bill and raising all the other loan limits, you might remember the vets," he said. "But that didn't happen."

As a result of the omission, areas of the country with some of the highest concentrations of veterans and high housing costs -- California, Maryland, Virginia, the District of Columbia and Florida, among others -- are effectively cut out of the stimulus package's benefits when it comes to VA loans. Mortgages backed by the VA are especially attractive because they allow qualified veterans to buy houses without a down payment.

Without a legislative fix, the situation won't change.

You might ask: How could this happen? How could a wartime president, a speaker of the House who represents high-cost San Francisco with its extensive military installations, an entire Cabinet-level agency, plus veterans affairs committees in the House and Senate all fail to include the VA program along with generous loan limit increases for Fannie, Freddie and FHA?

Asked for comment, the Department of Veterans Affairs declined to discuss the matter, saying in an e-mail that the "VA cannot comment on why Congress crafted the (stimulus) in the manner in which they did."

But House Veterans Affairs Committee Chairman Bob Filner, D-San Diego, was blunt: "I think it was out of ignorance," he said in a telephone interview Feb. 29. "I don't think (the plan drafters) understood the situation" -- specifically that the VA limits would not automatically increase along with the higher Fannie-Freddie limits. "Nobody thought about it, so this just slipped through."

The VA program guarantees 25 percent of the Fannie-Freddie conforming loan limit. Because private lenders generally are willing to make a zero down payment loan for four times the guarantee level, the program has an effective mortgage limit of $417,000 nationwide. The stimulus plan, however, temporarily reset the Fannie, Freddie and FHA limits to 125 percent of metropolitan area median home prices, creating dozens of different limits around the country, without referencing the VA guarantee formula.

"It makes the VA program irrelevant in a lot of places," Filner said.

He is sponsoring legislation that would raise the VA's effective limits to 150 percent of the Fannie-Freddie maximums. He also is seeking a "technical correction" amendment to the stimulus law, but is not optimistic that it can be rushed through quickly, given Congress' other priorities and tight schedule.

When Rasnake learned that the VA limits were overlooked, "I was devastated," he said. Rasnake's mortgage loan officer told him he is hardly alone. The lender said there were many vets looking to buy homes that he had lined up for VA financing in anticipation of the higher limits expected from the stimulus bill.

Though the VA program is smaller than Fannie Mae, Freddie Mac or FHA, it is substantial in size and relatively low risk to the government. The program guarantees 2.2 million home loans worth $243 billion, and the VA backs about 11,000 new loans per month, over half of which go to first-time buyers, according to Todd Bowers, director of government affairs for the Iraq and Afghanistan Veterans of America.

Many VA-backed mortgages involve no equity investment up front -- which typically raises default rates and foreclosures -- yet the program performs well. During the third quarter of 2007, the VA 30-day delinquency rate was 6.58 percent, compared with 12.92 percent for FHA and 16.3 percent for private subprime loans, according to the Mortgage Bankers Association.

The foreclosure rate for VA loans during the same period was 1.03 percent, compared with 2.2 percent for FHA and 6.89 percent for subprime loans.

That's pretty hard to miss. But they did.

E-mail Ken Harney at