Research findings are adding up to fears that the Federal Housing Administration’s (FHA) sharp loan volume increase of recent years is moving the agency “into uncharted, risky territory” making it more crucial than ever for policy makers to come up with “a delicate balancing act” that would ensure the FHA “is not pushed too far.”
An FHA Assessment Report released by the George Washington University Center for Real Estate and Urban Analysis warned that since the agency continues to grow market share and switched focus from its historical goal to insure low-downpayment home mortgages for low-to-moderate and first-time buyers to higher-balance mortgages, more reforms are needed to manage growing risks.
The Role and Reform of the Federal Housing Administration in a Recovering U.S. Housing Market report stated that it is still possible to control FHA’s growth in times when “it cannot count on house price growth to bail it out.”
Co-authored by Robert Van Order and Anthony Yezer, this first in the center’s planned 2011 series recommended that the FHA revert back to its traditional role and allow the private sector to shoulder more of the risk associated with insuring larger loans. Specifically, the report finds that the 2008 expansion of the FHA’s loan limits gives it the ability to insure nearly 90% of the available low-downpayment market.
As a result, the FHA’s share of the home purchase market ballooned from more than 6% in 2007 to more than 56% in 2009. The report found 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 the FHA.
“Without question, FHA played a major role in keeping the housing market afloat during the economic collapse of 2008 and 2009, and we need to be careful about cutting back too rapidly,” the authors wrote. They also warn that these large loan sizes “are unlikely in the long run to assist FHA in reaching its historical constituencies” because larger loans are likely to perform worse than the FHA’s traditional market, so the rapid increase in its market share will be even harder to manage.
Largely due to Congressional increases in loan limits the FHA’s share of the market increased from under 5% of the overall share by dollar volume of both purchase and refinance in 2007 to over 20% in recent times.
In 2006 the FHA could insure loans of up to $362,790 in the higher-cost markets. Since the credit crunch began, and in response to the 2008 housing crisis, FHA loan limits were revised to insure loans of up to $729,750 in higher-cost markets. What makes things worse is that Congress extended these pre-crash limits through 2011, while median home prices have significantly declined.
The report finds that 95% of both African-American and Hispanic borrowers selecting FHA mortgages had loan amounts under $300,000—meaning the increase in loan limits beats the original purpose of the FHA since loans beyond that size are not reaching minority borrowers.
Furthermore, the authors wrote, while numerous administration officials within Treasury and the Department of Housing and Urban Development “have expressed their commitment to the government allowing for the return of private capital to the market,” they have not accompanied those claims with actual suggestion or policies that would help manage FHA risk and help it return to its traditional role.