With the new year, the Federal Housing Administration has reduced the upper limit of the mortgages it is backing from $729,750 to $625,500 in areas like coastal California where home prices are high. The move affected 650 counties. Limits did not change in the rest of the country where home prices are lower.

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During the mortgage meltdown that precipitated the 2008 financial crisis, the FHA raised its loan limits and saw participation in its program quadruple to about 15 percent of U.S. home loan origination. Unfortunately, the agency saw its balance sheet worsen. Last year the agency raised insurance premiums paid by borrowers and tightened underwriting requirements. This year, the FHA is not expected to raise premiums again because it has concluded that rates are getting too expensive for the first time and moderate income home buyers the agency was intended to serve.

FHA shortfall

In the fiscal year that ended Sept. 30, 2013, the FHA was $1.3 billion short in covering the projected losses of the $1.1 trillion portfolio of home loans it backed. Since the government agency is required to maintain a cash reserve to cover all loan defaults, for the first time in its 79 years, it accepted a taxpayer subsidy of $1.7 billion on Sept. 30. In an American Banker report, just after the bailout, the FHA was said to have “roughly 686,000 seriously delinquent loans, representing $106 billion in total principal balances for all lenders.”

Potential reforms to the FHA

After the bailout, the U.S. Senate Committee on Banking, Housing, and Urban Affairs in July approved a bipartisan bill that set a floor on premiums the agency charged and required it to keep more of a cash reserve. The agency hopes that by scaling back its lending activities at the top of the market, it will expose the taxpayer to less risk.

With fiscal year 2014 ending in the heat of the congressional election campaign, a request for another bailout would be problematic for the White House. Representative Jeb Hensarling, the Texas Republican who leads the House Financial Services Committee, has already called for major reforms to the FHA. He would ultimately like to see it spun off from the Department of Housing and Urban Development and made a stand-alone agency, with its mission even more focused on low income and first time homebuyers. Hensarling stressed that he wants to see the FHA subjected to the same accounting rules that private lenders have to meet.

FHA backed mortgages are very attractive. They can be granted to borrowers with FICO scores as low as 500 although these home loans require at least a 10 percent down payment. Borrowers with scores over 580 can get a government-backed home loan for as little as 3.5 percent down. If an FHA-backed loan goes into foreclosure, the lender has the right to file a claim for reimbursement of losses. The FHA’s goal is “to reduce the number of full claims against the insurance fund,” a 2012 Government Accountability Office report on its finances said. The FHA’s guarantee does not apply if lenders are found to have violated underwriting or servicing standards.

The FHA has the date for interested parties to request a change to high cost area loan limits to January 31, 2014.

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