FHA Policy: Agency Lowers High-End Loan Limits

In a move designed to reduce the FHA's losses related to backing U.S. mortgage loans, the agency reduced loan limits for high-cost metro areas. The maximum loan amount for these expensive areas has been $729,750, but was recently reduced to $625,500. This change impacts 650 counties designated as high-cost areas.

Loan limits for standard FHA loans have not changed.

FHA Loses its Assets: Mortgage Insurance Reserves Go South

The recession hit the FHA hard. While the agency does not lend money itself, it insures lenders against losses if borrowers default and don't repay them. Until the recession, the FHA's Mutual Mortgage Insurance (MMI) program sustained itself through the collection of mortgage insurance premiums charged to borrowers with FHA loans.

The FHA mortgage insurance program sustained itself for 79 years until FHA insured mortgages nearly quadrupled to approximately 15 percent of loans originated. At the same time, private mortgage insurance companies and mortgage lenders steered clear of offering risky mortgages and approving applicants with compromised credit and/or little cash for down payments.

After the recession increased mortgage defaults, lenders tightened their approval guidelines for conventional mortgage loans. This left FHA programs as the primary source of home loans for first-time and moderate-income home buyers.

As of September 30, 2013 the FHA was $1.3 billion short of funds for paying lender claims on defaulted loans within the $1.1 trillion in mortgages backed by FHA. An estimated 686,000 FHA loans with principal balances that totaled $106 billion were seriously delinquent.

FHA Mortgage Insurance Program Receives First Taxpayer Bailout

FHA is legally required to maintain a certain level of cash reserves used for paying claims under the FHA MMI program; as the result of its increased exposure, the FHA accepted a $1.7 billion taxpayer bailout for the first time in the history of its mortgage insurance program.

HUD must find or create FHA policy solutions so that the MMI fund can be maintained at required levels without increasing costs to borrowers of FHA loans or relying on future bailouts.

Higher MMI Premiums Unlikely in 2014

FHA leaders determined that raising mutual mortgage insurance (MMI) premiums paid by borrowers would likely not occur in 2014. Higher mortgage rates were reducing home affordability for lower-income and cash-strapped borrowers. Increased borrower costs for MMI insurance were viewed as an unfair burden to mortgage applicants who rely on FHA loans for home purchases and refinancing.

FHA Reforms Ahead?

FHA policy solutions must be implemented so that the MMI fund can be maintained at required levels without increasing costs to borrowers of FHA loans or relying on future bailouts.

FHA faces a challenge to do this as recession era foreclosures go through the FHA claims process. The agency needs to stabilize its capital reserves while maintaining its ability to serve moderate-income homebuyers and homeowners.

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