The Obama administration’s plan to reduce the high end of the Federal Housing Administration’s loan limits will do little to help what should be its target markets of first-time, minority and low-income homebuyers, a report from George Washington University’s Center for Real Estate and Urban Analysis declared. If anything, to help those markets, further reductions in the ceiling and floor are needed.
Robert Van Order, the co-author of the report and the former chief economist for Freddie Mac, said, “We find that FHA’s current market share exceeds what is needed to serve these markets.
“In the wake of significant declines in home prices, we believe FHA could reduce its loan limits by approximately 50% and still almost entirely satisfy its target market. That would reduce its current large market share, which is difficult for FHA to manage.”
The authors said that market share is not an appropriate goal for FHA or a metric for determining whether loan limits are adequate to meet the goal of serving first-time, low-income and/or minority homebuyers. That being said, market share and serving its target markets are related.
The report says the government’s recommendations are higher than necessary for FHA to be able to serve its traditional market. Therefore they probably are insufficient to reach its goal of a 10% to 15% mortgage market share for FHA. The authors, Van Order and Anthony Yezer, argue that FHA could still serve 95% of its target market even if the maximum loan limits were cut by 50%.
If the current loan limits lapse in October, as planned, the new limit of $629,500 is still too high. They argue the minimum loan limit should be dropped from the current $271,050 to $200,000. That is 48% of the current conforming limit, which was FHA’s traditional basis for its floor.
At the other end of the spectrum, the FHA ceiling should be returned to 87% of the conforming limit, which the GWU study notes is the traditional formula for determining the ceiling levels. This would bring the maximum loan amount FHA could insure from $729,750 to $363,000.
Going even further, the study says a limit of $350,000 in high-cost markets and $200,000 in the lowest-cost markets is sufficient to meet the needs of that target constituency of first-time, minority and low-income homebuyers.
As part of their plan to cut FHA market share, Van Order and Yezer said the current area median home price must be used in calculating the local loan maximum, instead of the current policy which uses the 2008 median home price estimate.
The government also must reverse the current policy that allows FHA to guarantee loans of up to 125% of the median home price in high-cost markets.
“A commitment to returning FHA to its historical intent will ensure its long-term strength and viability, both because higher-balance loans probably will be riskier, and because FHA does not have the flexibility to operate well in a large market,” the report states.
A sidebar to the report addresses the failed FHA Section 235 program of 1968 to 1973 as well as the agency’s more recent experience with the American Dream Downpayment Act. The authors conclude, “FHA, as currently organized, should not be used as an experimental program to encourage homeownership.”
As for downpayment assistance programs, “encouraging first-time homeowners with no savings for downpayment or repairs to take on homeownership is not sound public policy,” they said.
