FHA loan limits returning to lower levels

by Peter G. Miller
July 8th, 2011

The Federal Housing Authority (FHA) is gradually returning to the comfy loan limits of old.

As of Oct. 1, 2011 FHA guidelines will be changed and maximum loan sizes will be reduced. The term “reduced” should not frighten anyone; available loan amounts will still be far above the financing levels required by most FHA borrowers.

Lowering FHA Loan limits

Under the new rules, the maximum FHA loan size will be reduced from $729,750 to $625,500 in high cost areas in the lower 48 states. As recently as 2006 the comparable FHA loan limit was $362,790.

A report from the National Association of Home Builders says “these declines will affect 620 counties, adding 3.87 million homes to those outside the temporary loan limits, for a total of 12.2 million homes ineligible for FHA-insured mortgages.”

However, the reality is that most homes are not for sale, most homes are not financed with an FHA mortgages and plenty of alternative mortgage options remain available. Besides, the typical FHA loan is about $176,000.

Greater market share for the FHA

More curious is a new report from Robert Van Order and Anthony Yezer with the George Washington University. They make the point that the FHA had 2.5 percent market share in 2006 and now have a market share which has reached nearly 30 percent.

That 2006 market share turns out to be a very good thing. The George Washington report explains that

“this small market share protected FHA from large losses and was a major factor in the relative stability of its default rates.”

Van Order and Yezer also make the point that “as conventional lending has expanded, the need for FHA to be a lender of last resort is fading.”

Actually, though the rule of the FHA is not fading, instead the program is being purposely and deliberately made less attractive so that it will lose market share.

Where is the FHA going?

For instance, the annual FHA mortgage insurance premium rose by 0.25 percent for new borrowers as of April 18th. Higher fees, of course, make products and services less attractive. In the case of the FHA there was simply no reason to raise the annual premium because the FHA’s biggest problem at this point is what to do with its extra dollars.

Don’t believe it? For fiscal 2011 the FHA is expected to generate excess reserves of $9.8 billion.

Van Oder and Yezer at least acknowledge that “market share per se 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.”

On this we can all agree–and wonder why it’s then necessary to purposely make FHA home loans needlessly more expensive.

The real reason is very simple: The FHA is a terrific program–and lenders in the private sector would like less competition from mortgages that are often available with lower interest costs.

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