GSEs (Fannie/Freddie),FHA&HUD

George Washington University Study Says FHA Carrying Too Much Risk

Posted on Wednesday, February 16, 2011

A study by George Washington University suggests the Federal Housing Administration (FHA) is carrying too much risk in insuring such a large percentage of large loans.
The study says in 2007 the FHA share of the home purchase market was at 6 percent. In 2009 that number came in at more than 56 percent.
“Without question, FHA played a major role in keeping the housing market afloat during the economic collapse of 2008 and 2009, and we need to be careful about cutting back too rapidly,” said Dr. Robert Van Order, chair of the
George Washington School of Business’ Center for Real Estate and Urban Analysis, which conducted the study.
He continued, “However, these large loan sizes are unlikely in the long run to assist FHA in reaching its historical constituencies. Our research indicates that larger loans are likely to perform worse than FHA’s traditional market, and we are concerned that the rapid increase in FHA’s market share will be hard to manage.”
The report notes that the size of the FHA’s loan limits have more than doubled in the past years. In 2006 FHA could insure loans of up to $362,790 in high-cost markets, now the agency’s temporary limit is $729,250 in the most expensive markets.
The plan for reforming the housing finance market released Friday by the Obama Administration also suggests returning FHA to its traditional role.
“As Fannie Mae and Freddie Mac’s presence in the market shrinks, we will encourage program changes at FHA to ensure that the private sector – not FHA – picks up this new market share,” says the report.
It continues, “The administration recommends that Congress allow the present increase in FHA conforming loan limits to expire as scheduled on October 1, 2011, after which it will explore further reductions.”
By: Joy Leopold DS News.


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