FHA in a “Risky Position” on Mortgages, Says Study

A George Washington University School of Business study says the Federal Housing Administration has taken on a “risky position” as it has gained market share and focused on higher balance mortgages throughout the housing crisis.

The report, titled “FHA Assessment Report: The Role and Reform of the Federal Housing Administration in a Recovering U.S. Housing Market,” analyzes the change in the Federal Housing Administration’s (FHA) role throughout the economic downturn, and recommends that the FHA make efforts to return to its original role, and allow private capital to return to the market. It says the FHA should refocus on helping first-time and low- to moderate-income homebuyers purchase homes. This, it says, will allow the private sector to insure larger, riskier loans.

The recommendations align with major goals of the Obama Administration’s housing plan, announced last week, which outlines a future for housing finance where the private sector will stand to gain market share abandoned by Fannie Mae and Freddie Mac and government will have a substantially smaller role.


One specific example cited in the GW study is the expansion of FHA’s loan limits in 2008, which allowed it to insure nearly 90% of the available low down payment market. This led to FHA’s share of the home purchase market to rise from roughy 6% in 2007 to 56% in 2009. Further, the report finds those loans valued highest, in the $350,000-plus bracket, perform 20% worse than smaller loans, historically. Current loan limits will extend through 2011.

“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,” said report co-author Dr. Van Order, Oliver T. Carr Professor of Real Estate and chair of GWSB’s Center for Real Estate and Urban Analysis. “However, these large loan sizes are unlikely in the long run to assist FHA in reaching its historical constituencies. Our research indicates that larger loans are likely to perform worse than FHA’s traditional market, and we are concerned that the rapid increase in FHA’s market share will be hard to manage.”

With FHA loan limits having risen rapidly over the course of the economic downturn, and the median home price losing value over that same period, the report recommends FHA reform. Among other recommendations, that reform includes reverting back to using the current area median home price, rather than the 2008 number, as the basis for its regional limits and reducing the high and low end of FHA’s loan limits.

View the full report.

Written by Elizabeth Ecker

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