Study shows current Obama proposal for FHA loan limits ineffective

FHA Assessment Report

George Washington University has released the June 2011 edition of the “FHA Assessment Report: The Role and Reform of the Federal Housing Administration in a Recovering U. S. Housing Market” which finds that the White House’s current proposal to reduce the higher end of FHA’s loan limits would have little to no impact on its current market share as the current loan limits are larger than what is necessary to serve FHA’s target demographic of first time and low/moderate income borrowers. The study asserts that Obama and his team must propose larger changes as FHA is phased out of its role as lender of last resort.

The study reveals that even if the maximum FHA loan limits were reduced by nearly 50%, they could still serve 95% of its “historic” target market and to continue serving this market, they only need to serve between nine to 15 percent of all mortgage origination as opposed to the current 30% share they are originating.

“FHA’s expansion played a major role in keeping the housing market afloat during the economic collapse of 2008 and 2009. 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,” said Dr. Robert Van Order, report co-author.

“We find that FHA’s current market share exceeds what is needed to serve these markets,” Dr. Van Order continued. “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 revealed that the current proposal only impacts three percent of all loans endorsed in 2010.

Recommendations made in the study include:

The Obama Administration and Congress are recommended by the George Washington University study to:

1. Decrease the maximum loan size that can qualify for FHA insurance — first by allowing the present increase in those limits to expire as scheduled on October 1, 2011, and then by reviewing whether those limits should be decreased further moving forward.
2. To enhance solvency of the program, increase the price of FHA mortgage insurance, putting in place another 25 basis point increase in the annual mortgage insurance premium, as detailed in the President’s 2012 Budget.
3. Coordinate reforms of Fannie Mae and Freddie Mac with changes at FHA “to help ensure the private market, not FHA, fills the opportunities created by reform.”
4. Reduce the FHA’s minimum loan limit from the current $271,050 to $200,000 — 48 percent of the current GSE limit, which was FHA’s traditional basis for its loan minimum, or “floor.”
5. Return the FHA loan limit “ceiling” to 87% of the GSE limit — the traditional formula for determining the ceiling levels — bringing the maximum loan amount FHA could insure from $729,750 to $363,000
6. Returning to use of the current area median home price in calculating the local loan maximum,
   moving away from the 2008 median home price estimate.
7. Reversing the current policy that allows FHA to guarantee loans of up to 125 percent of the median home price in high-cost markets.

Click here to download the full study.