Last Updated Apr 26, 2011 4:49 PM EDT
Has FHA topped out? Does the FHA need to shrink the size of its loans in order to fulfill its mission while balancing out taxpayers' risk?
A little over a year ago, FHA announced it would be increasing down payment requirements for some borrowers, and mortgage insurance premiums for all in an effort to mitigate the risk associated with the vast numbers of loans it has guaranteed over the past six years.
Historically, FHA accounted for about 6 percent of all home loans. But the housing crisis changed all that. FHA's share of the purchase mortgage market exploded from over 6 percent in 2007 to more than 56 percent in 2009.
Who's doing the borrowing? Home buyers who need larger loans. Hardly what FHA was originally set up to do.
Traditionally, it has been the responsibility of the private sector to take on more of the risk associated with insuring larger loans, yet now bigger ticket buyers who can't get financing are reaching toward FHA to make their American Dream come true.
But at what cost to taxpayers? Apparently, a pretty big one. The FHA is basically broke. Doing small loans will help mitigate that risk going forward: According to a new study released by the George Washington School of Business, the Federal Housing Administration needs to return to lower balance loans, moving away from the riskier role it took following the housing market crash.
The report, titled "FHA Assessment Report: The Role and Reform of the Federal Housing Administration in a Recovering U.S. Housing Market," recommends that the government lender revert to its traditional role of helping first-time home buyers, low to moderate income home buyers, and minorities purchase homes.
The GW report went on to say the highest valued loans (anything over $350,000) perform 20 percent worse than smaller loans the FHA historically backed.
It begs the question: Will returning to smaller FHA loans reduce taxpayers' risk?
Dr. Van Order, Oliver T. Carr Professor of Real Estate and chair of CREUA says the FHA had to increase its high risk loans to keep the housing market afloat during the economic collapse of 2008 and 2009, and the government organization needs to be careful not to cut back too rapidly.
"However," says Order, "these large loan sizes are unlikely in the long run to assist FHA in reaching its historical constituencies. Our research indicates that larger loans are likely to perform worse than FHA's traditional market, and we are concerned that the rapid increase in FHA's market share will be hard to manage."
Key Findings From the Report:
- In 2006, FHA could insure loans of up to $362,790
- Today, in response to the 2008 housing crisis, FHA loan limits have been revised to insure loans of up to $729,750
- Congress has extended these pre-crash limits through 2011 (even though the average home value in the U.S. is $175, 200)
- Ninety-five percent of African-American and Hispanic borrowers selecting FHA mortgages borrowed less than $300,000. Loan limits beyond this size are not reaching as many FHA minority borrowers as they are intended.
- The 2008 expansion of FHA's loan limits gives it the ability to insure nearly 90 percent of the available low down payment market
When do you think the FHA will return to its traditionally smaller loans and how fast should they scale back?
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Ilyce R. Glink is the author of several books, including 100 Questions Every First-Time Home Buyer Should Ask and Buy, Close, Move In!. She blogs about money and real estate at ThinkGlink.com and The Equifax Personal Finance Blog, and is Chief Content Strategist at RealtyJoin.com, a community for real estate investors.