The maximum mortgage available through the FHA would be dramatically reduced under a proposal put forward by researchers at the George Washington University School of Business.
The proposal suggests going far beyond the scheduled reduction in FHA loan limits set for Oct. 1, which will only reduce mortgage limits in certain high-cost areas around the country. Instead, the study's authors' propose slashing FHA loan limits across the board, to a maximum of $200,000 for most of the nation, down from $271,000 currently, and an upper limit of $363,000 in high-cost areas.
The current upper limit for high-cost areas is $729,750 and is due to be reduced to $625,500 on Oct. 1, a move that will affect only 669 out of 3,334 U.S. counties or county equivalents. The study estimates that only 2 percent of mortgages endorsed thus far this year would be affected (some high-cost areas will get new lower limits below $625,500 but above $271,000 due to recalculations of property values used to set the limits).
The study's authors, Robert Van Order and Anthony Yezer of the GWU School of Business, say the changes, to be implemented over time, would move the FHA back toward its traditional role as a mortgage lender for low-income homebuyers and minorities, and away from its more recent role as a lender of last resort.
Such steps would help reduce the FHA's market share to 10-15 percent of the overall mortgage market, which the Administration has set as a target. The paper concludes that steps the administration has taken to date, including the scheduled Oct. 1 rollback and increasing the annual insurance premium by one quarter of percentage point, are insufficient to reach that goal.
The authors note that the existing high-cost limits were implemented in 2008 to keep mortgage credit flowing in the wake of the housing market crisis. The FHA's market share shot up from 6 percent of home purchases in 2007 to more than 56 percent in 2009, driven by the higher limits and the overall tightening of private sector mortgage credit. Prior to 2008, the FHA limit for all communities was the standard limit of $271,000.
The study's authors argue for rolling back that limit because it was based on pre-2008 housing prices and had been readjusted upward several times over the previous decade. A lower standard limit, they argue, would be more in keeping with current housing values.
A $200,000 limit would also represent 48 percent of the limit for Fannie Mae and Freddie Mac loans, which they say has been the traditional FHA limit.
The study was published last month by: The George Washington University Center for Real Estate and Urban Analysis