The performance of high-balance loans is not going help Federal Housing Administration increase its capital and could be risky for the government-backed insurance fund, according to a study published by two George Washington University professors.
FHA's share of the mortgage market has grown rapidly since early 2008 when Congress, in response to the financial crisis, boosted FHA's maximum loan limit to $729,750 from $362,800.
"The report finds that loans valued at the highest levels -- more than $350,000 -- perform approximately 20% worse than smaller loans that are within the historical scope of FHA," said finance professor Robert Van Order said.
Loans originated in 2008 with balances of $450,000 to $500,000 have a 12.32% default rate, compared to a 9.79% default rate for loans with balances of $150,000 to $200,000.
As the housing market improves, Van Order says Congress should consider gradually reducing FHA's loan limit back to $362,800 and possibly lower if house prices stay at current depressed levels.
The report, co-authored by professor Anthony Yezer, shows that 95% of all minority borrowers who selected FHA had loan amounts of under $300,000.
"There is no great public policy served by selling insurance on low-downpayment, high-balance loans. And it is possibly risky and hard to manage," Van Order told National Mortgage News.
