Last Friday, the Federal Housing Administration announced that it will reduce the maximum threshold for the high-price mortgages it is willing to insure. This change was called for by the Housing and Economic Recovery Act of 2008, but was delayed several times in response to continuing economic turmoil. Currently, in the highest cost areas, the FHA insures mortgages up to $729,750. Starting January 1, 2014, this figure will be reduced to $625,500. The change is predicted to impact new mortgagors in about 650 counties nationwide.
The FHA was created after the Great Depression to stabilize the housing market by selling mortgage insurance to homebuyers. Mortgage insurance mitigates the risk to originators and investors in the event of a borrower’s default, thereby lowering down payments and increasing buyers’ access to financing. The agency, now subsumed under the Department of Housing and Urban Development, has approximately five million mortgages in its portfolio.
FHA Relief Mandated By The Housing Crisis Has Already Come At A Cost, Which May Be Merely The Tip Of The Iceberg
The FHA took a large hit in the wake of the housing crisis, when it quadrupled its activity to fill a void in the mortgage insurance market. During this period, loan limits were raised to the current levels in order to accommodate more mortgages, mortgages which private MI companies were no longer willing to insure. Without this increased FHA participation, it was feared that brand new, high-cost developments throughout the country would become ghost towns as few homebuyers would be able to obtain financing, a stark possibility that would have devastated the housing market to an even greater extent.
The FHA’s rescue came at a cost, however; in September of this year, the agency, which has historically operated solely off of its own profits, reported that it would need its first ever taxpayer bailout in its 79 years of existence, to the tune of $1.7 billion dollars. However, this may be merely the tip of the iceberg–experts estimate that the FHA’s mortgage crisis-related losses may eventually total $100 billion.
Commentators see the pending reduction as reflective of housing market stabilization. FHA Commissioner, Carol Galante, remarked that the implementation of lower loan limits is “an important step as private capital returns to portions of the market and enables FHA to concentrate on those borrowers that are still underserved.”