Lenders would make fewer and more costly Federal Housing Administration loans if federal mortgage insurance were scaled back, the General Accounting Office reported Friday.
According to the report, which was requested by Rep. Rick Lazio, R-N.Y., the number of FHA-backed loans could fall by as much as 28%, and interest rates could climb by as much as 50 basis points.
"Reducing FHA's insurance coverage will make it more difficult and, in some cases, more costly for some potential homebuyers to purchase a home," according to the congressional watchdog agency.
Through the FHA mortgage insurance program, banks and other lenders are insured against nearly all losses resulting from foreclosures on single- family homes. FHA mortgage insurance is available to homebuyers who are able to make only limited down payments and who are planning to borrow less than $160,950.
Concerned about the risks that loan defaults pose to the insurance fund, Rep. Lazio, who is chairman of House Banking's housing subcommittee, asked the GAO to determine the effects of reducing FHA insurance coverage.
The agency based much of the report on the results of interviews with FHA lenders. The lenders said that reducing FHA's insurance coverage would have the greatest effect on low-income, first-time, and minority borrowers and on people purchasing older homes.
"Lenders indicated that they would probably tighten underwriting standards for FHA-insured loans to target them away from borrowers in higher-risk categories," the GAO said.
A reduction in coverage also might force small FHA lenders to stop making these loans because of increased risk, the report said.
"If lenders continued to hold this catastrophic risk, their regulators or shareholders might require capital to be held against this risk, decreasing the profitability of lending," the GAO said.