Study: FHA loan limits are larger than now needed
June 30, 2011
• Could be cut and not impact target users, says report
• Large loan limits were set at the top of the bubble
The Federal Housing Association’s current loan limits are larger than necessary to serve its targeted market of first-time and low to moderate income borrowers, according to a study released Thursday by George Washington University’s Center for Real Estate and Urban Analysis.
The Obama Administration’s current proposal to reduce the higher end of FHA’s loan limits would have only a small impact on its current market share, says the study, which adds that larger changes may be needed as FHA phases out its recent role as lender of last resort.
The report, “FHA Assessment Report: The Role and Reform of the Federal Housing Administration in a Recovering U. S. Housing Market,” concludes that the FHA still could serve 95 percent of its historic targeted market even if the maximum FHA loan limits were reduced by nearly 50 percent.
To serve its target population, the report concludes that FHA only needs a market share of somewhere between 9 percent to 15 percent of total mortgage originations. Current estimates by the Obama Administration put its market share at approximately 30 percent of originations.
“FHA’s expansion played a major role in keeping the housing market afloat during the economic collapse of 2008 and 2009,” says Robert Van Order, co-author of the report. “However, we now are left with large loan limits that were set when home prices at the top of the bubble. They don’t reflect current market conditions and are unlikely to assist the FHA in reaching its historical constituencies – first time, minority and low income homebuyers. ”
FHA’s loan limits have risen rapidly since the credit crunch began. In 2006, the FHA could insure loans of up to $362,790 in the higher cost markets. In response to the 2008 housing crisis, FHA loan limits were revised to insure loans of up to $729,750 in these high cost markets. Recently, the Obama Administration has proposed allowing current law to lapse in October, causing a modest decrease in these limits to $629,500.
“We find that FHA’s current market share exceeds what is needed to serve these markets,” says Mr. Van Order. “In the wake of significant declines in home prices, we believe the FHA could reduce its loan limits by approximately 50 percent and still almost entirely satisfy its target market. That would reduce its currently large market share, which is difficult for FHA to manage.”
The report analyzes the size of FHA’s target audiences to determine appropriate limits. It concludes that an FHA limit of $350,000 in the high cost markets and a limit of $200,000 in the lowest cost markets is sufficient to satisfy more than 95 percent of FHA’s target constituency. Additionally, the report finds that the Administration’s proposed reductions in loan limits would affect only three percent of loans endorsed in calendar year 2010.
The report recommends that Congress and the administration:
• Reduce FHA’s loan limit in the lowest cost markets from the current $271,050 to $200,000;
• Return the FHA loan limit in high cost markets from $729,750 to $363,000. This would be achieved by reversing the current policy that allows FHA to guarantee loans of up to 125 percent of the median home price in high-cost markets;
• Return to using current area median home price in calculating the local loan maximum, moving away from the 2008 median home price estimate.