The reduced FHA loan limits that took effect at the end of last year are expected to have an outsized effect on minority borrowers and potential homebuyers in metropolitan areas in general, according to a new analysis from the Urban Institute

Under the new guidelines, FHA loan limits are unchanged in 92 percent of non-metropolitan areas, according to figures from the Mortgage Bankers Association, while half of all metropolitan are seeing changes, with 44 percent seeing lower limits.

Part of the change is due to a reduction in the loan ceiling for high-value areas, which dropped from $729,750 to $625,000, and changes in the formula to determine loan limits in high-value areas that do not reach the ceiling.

However, a much bigger impact is due to a change in how median home prices, which are used to set loan limits for a given area, are determined. Prior to Jan. 1, the FHA based its determination of median home prices on pre-2008 home values; under the new formula, home values are based on their highest level since the crash in 2008.

Large reductions in some areas

For areas that have seen steep price declines since 2008, this can mean big drops in the size of an FHA loan borrowers can qualify for in those areas. For example, the pre-2008 median home value for the Riverside-San Bernadino-Ontario California area was calculated at $400,000, compared to a post-2008 mean of $252,000. Along with a reduction in the multiplier used to determine loan limits, this produced a reduction in the FHA loan ceiling for that area from $500,000 to $355,350.

Another factor that has been largely overlooked has been that the FHA redrew the boundaries of some of its "Metropolitan Statistical Areas" that share a common loan limit. So when a high-value county was shifted from one MSA to another, it could have a drastic impact.

For example, Utah's Summit County, which includes the ski resort town of Park City, was removed from the Salt Lake City MSA, causing loan limits for FHA borrowers in Salt Lake City itself to drop from the old maximum of $729,250 to $303,928 - less than half the previous limit.

About three-quarters of U.S counties affected.

Overall, some 652 U.S. counties are seeing lower loan limits as a result of the changes, while 89 have higher limits, according to the Mortgage Bankers Association's figures. The rest of the nation's 3,324 counties are unaffected.

Of counties with lower limits, 60 percent are due to the change to post-2008 home values rather than the 2006/07 median values previously used. Another 157 are due to reducing the multiplier used to calculate loan limits in high-value areas to 115 percent of median home values from 125 percent previously; another 73 were due to the reduction in the maximum loan ceiling; and 33 were due to changes in MSA boundaries, according to the Urban League.

Impact on minority populations

Based on U.S. Census tracts, the Urban League found that 16 of the 30 U.S. Census tracts most affected by the new limits are over 50 percent minority population. These areas also tended to see larger declines in loan limits than the 8-14 percent range the FHA formula would generally suggest.

The 30 most affected districts are also concentrated in just seven MSAs, according to the Urban League, many in California - Riverside, Fresno, Stockton and Bakersfield. Las Vegas, Salt Lake City, and Phoenix are the others.

Published on January 21, 2014