WASHINGTON -- The debate over expected changes in the Federal Housing Administration single-family loan insurance program is shaping up as more of a clash of business interests than of social philosophies.

Lenders want the FHA to insure larger loans because they believe it would increase volume. Insurers fear that would divert some of their customers to FHA loan, and they resent government competition.

The two are vying for opportunities in the middle-class market, particularly first-time homebuyers -- often a couple who together make far above the median income but have not yet saved enough money to make a large down payment.

Higher Limit on Coasts?

The FHA's lower down payment and more flexible qualifying conditions make it easier for these borrowers to buy homes.

One change under consideration is raising the loan limit in high-cost housing areas, such as cities on the two coasts.

The agency now insures loans up to $151, 725 in those areas, or 75% of the maximum loans insured by the Federal National Mortgage Association or Federal Home Loan Mortgage Corp. That may be raised to 85% of the current secondary market limit, or about $172,550, according to industry sources.

"Certainly the higher the mortgage amount, the more market you can go after," said Rick L. McGuire, senior vice-president of Inland Mortgage Corp. in Indianapolis.

When the FHA increased loan limits in high-cost areas from $125,000 to $150,000 a year ago, it "opened the doors up" too more business in those areas, Mr. McGuire said.

He's sure that if loan limits go up, the FHA will pull in new borrowers, whom "private mortgage insurers cannot accommodate because they manage their risks differently than FHA."

Bill Simpson, president of Republic Mortgage Insurance, Winston-Salem, N.C., isn't sure.

He believes that if the FHA insures larger loans, the government insurance will inevitably steal some business from him.

The Good with the Bad

"They'll get people we would have liked to insure [and] those we would not have liked to insure," he said.

Hugh R. Harris, president of BancBoston Mortgage Co., Jacksonville, Fla., tends to agree that a higher FHA loan limit would hurt private insurers.

"I don't know if [FHA changes are] going to generate that much more business, because I think the housing market is pretty well served," he said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.