Something to Read While You Wait for that White House GSE Report

Jonesing for the Obama administration’s official proposal to overhaul Fannie and Freddie? Here are some housing reform prescriptions to tide you over until tomorrow morning.

A report published this month by Robert Van Order, a finance professor at George Washington University, recommends that the Federal Housing Administration be prohibited from insuring high-cost homes and that its loan limits be lowered to the median home price in each region.

FHA should stop insuring loans in high-cost markets and should scale back inuring loans with high loan-to-value ratios, Van Order, a former economist at the Department of Housing and Urban Development, wrote.  FHA’s claim rates are closely correlated to borrowers who have negative equity because they made a low down payment and took out loans since 2006, when property values started to decline, the paper says.

FHA also has been insuring fewer low-priced loans. More than 70% of all FHA loans have a loan-to-value ratio of 95% or higher, the report said.

“Using current house prices will ensure that FHA insures loans that are reflective of the average housing market,” he wrote.

The report also suggests that FHA stop ensuring loans of up to 125% of the median home price in high-cost markets and reevaluate debt-to-income ratio requirements of borrowers.

Loan limits for FHA, Fannie Mae and Freddie Mac are set to drop to a maximum of $625,500 in September from the current $729,750 unless Congress approves an extension.

Update: Bethany McLean at Slate explains the debate over the qualified residential mortgage rule, which, she notes, "matters as much as Fannie and Freddie." There, that's plenty to keep you occupied until 8:30 a.m. Eastern.