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GWSB Report: FHA Loan Limits Exceed Necessary Level

Robert Van Order

Robert Van Order

A study co-authored by Robert Van Order, Oliver T. Carr professor of real estate, and Anthony Yezer, professor of economics, reports that the Federal Housing Administration’s (FHA) current loan limits are larger than necessary to serve its target market of first-time and low-to-moderate income borrowers.  The study finds that the Obama Administration’s proposal to reduce the higher end of FHA’s loan limits would have a small impact on its current market share and that larger changes are 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, target market even if the maximum FHA loan limits were reduced by nearly 50 percent.  According to the report, the FHA only needs a market share of between 9 and 15 percent of all mortgage originations to serve its target market.  Administration estimates put FHA’s market share at approximately 30 percent of mortgage originations.

“FHA’s expansion played a major role in keeping the housing market afloat during the economic collapse 0f 2008 and 2009,” Van Order said.  “However, we now are left with large loan limits that were set when home prices were at the top of the bubble.  They don’t reflect current markets conditions and are unlikely to assist the FHA in reaching its historical constituencies – first-time, minority and low-income homebuyers.

“We find that FHA’s current market share exceeds what is needed to serve these markets,” Van Order continued.  “In the wake of significant declines in home prices, we believe 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.”

In 2006, the FHA insured loans of up to $362,790 in higher-cost markets.  In response to the housing crisis, the limit was increased to $729,750.  The administration has proposed allowing current law to lapse in October, which would lower the limit to $629,500.  The report concludes that loan limits of $350,000 in high-cost markets and $200,000 in the lowest cost markets would be sufficient for the FHA to satisfy more than 95 percent of its constituency.

The report, which was released on June 30 by GWSB’s Center for Real Estate and Urban Analysis, received considerable attention from mortgage industry media.  (See Getting Ink, below.)

Posted by gwsb on July 6, 2011 | Filed under: GWSB News.

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