A government study slated for release today concludes expanding FHA mortgage insurance limits would increase defaults and do little to help more families afford homes.

In his fiscal year 1999 budget, President Clinton proposed increasing the size mortgage the FHA may insure to 100% of the Fannie Mae/Freddie Mac limit, which is $227,150 this year. Currently the FHA may insure loans up to 95% of the median home price in each market, with the maximum loan set at $170,362.

According to the report by the nonpartisan Congressional Research Service, current FHA limits let borrowers purchase a median-priced home in 97% of all U.S. counties. Raising the limit would mean these borrowers could purchase homes that were worth 163% of the median home price in their market, the report states.

"The notion that higher-value loans entail greater risks is intuitive," wrote Bruce E. Foote and Pamela Hairston in the 35-page report. "Higher amounts imply that borrowers have higher debt service relative to income."

As a result, these borrowers are more likely to default, forcing the FHA to cover their losses, the researchers said.

They also said the plan would not help more families afford homes.

"The administration's proposed increase in the FHA limit would in most areas not so much serve to enable households to buy homes as much as to increase the price of homes they can purchase," they wrote.

The Congressional Research Service, a division of the Library of Congress, provides background information to lawmakers on a wide range of public policy issues. The FHA proposal has already attracted opposition in Congress. House Banking Committee Chairman Jim Leach urged Speaker Newt Gingrich to kill the proposal.

"The increase would move us toward a socialization of the financial mortgage markets and create a virtual nonfree market approach," the Iowa Republican wrote in a letter last month, which Rep. Rick Lazio, R-N.Y., also signed.

Officials at the Department of Housing and Urban Development, which oversees the FHA, did not return calls for comment. After Marc C. Smith, president of the Mortgage Bankers Association of America, was briefed on the report, he questioned how the research service could reach such conclusions.

"FHA serves low- and moderate-income households, but because of the limits today cannot serve moderate-income households in high-cost markets," said Mr. Smith, who is also president and chief executive of Crestar Mortgage Corp. in Richmond, Va.

The researchers proposed several options to raising the FHA limit, including:

Do nothing. FHA loans already are tied to the Fannie Mae/Freddie Mac limits, which means the size of eligible loans increases every year.

Permit the FHA to insure loans equal to 50% or 75% of the Fannie Mae/Freddie Mac limit. This would produce a single FHA limit, making the program easier to administer.

Eliminate the cap, letting the FHA insure mortgages up to 95% of the median home price in each market.

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