Report: FHA should refocus on low- to middle-income borrowers

“However, these large loan sizes are unlikely in the long run to assist FHA in reaching its historical constituencies.”

Van Order, who authored the report with Anthony Yezer, professor of economics, said the 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.”

The report found that loans valued at the highest levels, more than $350,000, perform approximately 20 percent worse than smaller loans that are within the historical scope of FHA. 

Specifically, the report finds that the 2008 expansion of FHA’s loan limits provides the agency with the ability to insure nearly 90 percent of the available low downpayment market. 

The report offers several policy solutions to accomplish this objective and reduce FHA’s “large and risky” market share that include reverting back to using the current area median home price, rather than the 2008 number, as the basis for its regional limits and reducing the high and low end of FHA’s loan limits.

As a result, FHA’s share of the home purchase market rose sharply to more than 56 percent in 2009 from more than 6 percent in 2007.

The report analyzes FHA’s loan limits, observing that they rose rapidly since the credit crunch began. 

In 2006, FHA could insure loans of up to $362,790 in the higher cost markets. In response to the financial and continued housing crisis, FHA loan limits were revised to insure loans of up to $729,750 in those higher cost markets. 

Congress has extended these pre-crash limits through 2011, while median home prices have significantly dropped. 

Finally, the report finds that 95 percent of African-American and Hispanic borrowers selecting FHA mortgages had loan amounts under $300,000, showing that loan limits beyond this size are not reaching minority borrowers.

Numerous administration officials within the Departments of Treasury and Housing and Urban Development have expressed their commitment to the government allowing for the return of private capital to the market. 

In a report released Friday, Fannie Mae and Freddie Mac would cease to exist under the housing plan that provides for a winding down the troubled government-sponsored enterprises by inviting private dollars to crowd out government support for home loans. 

It lays out three options for the nation’s housing market after Fannie and Freddie are wound down, with varying roles for the government to play.

Peter Schroeder contributed to this story.