The advertised purpose of raising the FHA loan limits is to be able to help more homeowners who are facing foreclosure. As others have said, the conventional market no longer offers "sub-prime" type loans. They also require downpayments now, for the most part, of at least 10% (or more). It allows some to refi out of their toxic adjustables into a FHA fixed loan. It can't help all, because many are already too upside down on their mortgages, but it can help some.
The big upside however is it gives the politicans a way to help their lender "buddies" who keep their campaign coffers full. For each HO who can refi into an FHA loan, it takes the lender off the hook for that loan, multiply that a couple hundred thousand times, and it adds up to a big bail out for the lenders. Those in charge aren't too worried if many of these new FHA loans will go bad further down the road, they can just have the tax payer foot the bill.
It is a way to bail out lenders without taking the political heat. If the sh*t hits the fan a couple years down the road, they can just scapegoat a few appraisers and brokers to direct the attention away from the flaws in the lending policies to begin with, sort of like what is happening now on the conventional end of things. The sad fact is they are running around looking for fraud, but most of the damage was done legally because the system was totally broken via the toxic loan products that were legally available.
