Even if Congress and the Obama administration allow federal loan limits to fall back to pre-crisis levels in October, as expected, the limits will still be higher than they need to be, professors at The George Washington University School of Business have determined.
"In the wake of significant declines in home prices, we believe the [Federal Housing Administration] could reduce its loan limits by approximately 50% and still almost entirely satisfy its target market," said Robert Van Order, co-author of the FHA assessment report from the university's Center for Real Estate and Urban Analysis.
"That would reduce its currently large market share, which is difficult for FHA to manage," he said.
Reducing its maximum loan limits by nearly 50% would still enable the FHA to serve 95% of its historic target market — first-time, minority, and low-income homebuyers, the report said.
To serve this target market, the report concludes that FHA only needs a market share of somewhere between 9% and 15% percent of total mortgage originations. Current estimates put its market share at about 30% of originations.
Congress and the Obama administration have proposed allowing the maximum loan limits on mortgages insured by FHA and purchased or securitized by Fannie Mae and Freddie Mac to expire in October.
That means in the most expensive markets the limit will fall to $625,500 from $729,750. Congress first raised the limits on FHA, Freddie Mac and Fannie Mae loans in 2008, and since February 2009, the limits have been extended by Congress on an annual basis.
According to an analysis by the Department of Housing and Urban Development, the impact from this change will be small, with only about 3% of loans endorsed in 2010, and 2% of loans endorsed so far in 2011, being affected.
"FHA's expansion played a major role in keeping the housing market afloat during the economic collapse of 2008 and 2009," Van Order said.
"However, we now are left with large loan limits that were set when home prices were at the top of the bubble. They don't reflect current market conditions and are unlikely to assist the FHA in reaching its historical constituencies."