Should we cut FHA loan limits?by Peter Miller
The 2012 FHA Assessment Report, the fourth in the series, suggests that not only should loan limits fall, but that the measure used to create loan limits locally should also be yanked back into reality.
How bad is the FHA hurting?
According to Professors Robert Van Order and Anthony Yezer, “Estimates of [the FHA's] long-run conditions range from bad, but probably not needing more money, to terrible, perhaps needing an additional influx of $50 billion. The truth is probably somewhere in between, not to be known for some time. It will mostly depend on how well the economy does over the next few years, particularly regarding the movement of house prices. Current conditions may be improving, but another disaster is still possible.”
There are always estimates as well as disagreements regarding any major government program. Some of the disagreement relates to little more than political philosophy. In the case of the FHA, there are some who think it should simply not exist because the work of insuring home mortgages can also be done by firms in the private sector.
The FHA has changed for the better
But cutting FHA loan limits by about 50 percent solves a problem which doesn’t exist. The truth of the matter is that during the past few years, the FHA program has changed significantly and the result is a better economic grounding.
Figures from HUD plainly show that the FHA book of business generated billions of dollars in excess reserves from 1992 to 1999. The program fell into a financial hole, losing money from 2000 into the first quarter of 2009. The largest loss was in 2008 when the program racked up nearly $10 billion in new potential liabilities. From 2009 to 2010, the program has been both stable and profit-making.
How did the FHA generate this improvement?
- It got rid of more than 1,500 lenders who once offered FHA mortgages.
- It raised down payment requirements from a 3 percent minimum to 3.5 percent.
- It started going after the lenders who made FHA loans to borrowers who should not have received such financing because of qualification issues or paperwork problems. In the past few months the FHA has taken in more than $1 billion from lenders for various reasons.
- All mortgage insurance companies have been helped by historically low mortgage rates which create greater levels of affordability.
The FHA to some extent agrees with the two George Washington professors. Today’s upper loan limit–$729,750–is higher than the conventional loan limit of $625,500. It doesn’t make a lot of sense that a program which was intended for borrowers with limited means now offers loans which are larger than conventional financing.
Cutting FHA loan limits to about half the current levels may sound good in theory but on a practical level it would make financing more difficult for entry-level borrowers. The better alternative is to have a vibrant FHA program which forces all lenders to compete vigorously for lower- and middle-income borrowers. While cutting the congressionally-imposed top FHA loan limit makes sense, reducing the minimum would no doubt hurt entry-level borrowers and those with limited incomes, households which have few financing choices.