Study: Reduced FHA Loan Limits No Big Deal

July 6, 2011 No Comments »

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A new study from George Washington University claims reduced FHA loan limits will do little to shake the already rattled mortgage market.

The authors noted that once FHA loan limits are reduced in October of this year, most of the FHA’s target population, which includes first-time buyers and low-to-moderate income borrowers, will be served.

In fact, even if the maximum FHA loan limits were slashed in half, the authors believe the FHA could still serve 95 percent of its historic targeted market.

Unfortunately, history isn’t at play here – in the past few years since the mortgage crisis, the FHA has grabbed a huge market share, becoming the so-called “lender of last resort.”

Current estimates put the FHA loan-share at around 30 percent of loan origination volume, while the report concluded that it should only be between nine and 15 percent.

“We find that FHA’s current market share exceeds what is needed to serve these markets,” said report co-author Robert Van Order, in a release.

“In the wake of significant declines in home prices, we believe the FHA could reduce its loan limits by approximately 50 percent and still almost entirely satisfy its target market. That would reduce its currently large market share, which is difficult for FHA to manage.”

Back in 2006, the max FHA loan limit was $362,790 in high-cost markets, but it’s currently double that, at $729,750.

Come October 1, it will fall to a maximum of $625,500 in the highest priced areas of the nation.

Industry groups such as the National Association of Realtors are concerned it will hit the housing market at a time when it needs all the help it can get.

The study’s authors recommend at maximum FHA loan limit of $200,000 in low-cost areas and $363,000 in high-cost areas.

That probably won’t happen, but it’s clear the loan limits will trend lower, so jumbo mortgages will re-gain market share and financing will get more expensive.

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