WASHINGTON – The size of mortgages backed by the Federal Housing Administration should shrink dramatically so the agency can protect itself against unnecessary financial risk, according to a report to be released this week by George Washington University.

The FHA’s share of the mortgage market has surged in recent years, in part because it guarantees larger loans than at any other time in its history. As the mortgage crisis unfolded and credit markets froze, the FHA stepped in to insure loans of up to $729,750 for single-family homes in pricey markets.

While the move helped the agency keep the housing market afloat during its darkest days, the report said the larger loan sizes expose the FHA to considerable financial risk and distract it from the core mission of helping first-time and minority home buyers.

On Friday, the Obama administration is expected to release a “white paper” that recommends allowing the loan limits to lapse to lower levels so that the government can slowly scale back its role in the mortgage market, enabling the private sector to fill the vacuum. If all goes as planned, the higher loan limits would expire on Sept. 30 as previously scheduled and drop to $625,500 in the most expensive markets.

“That’s fine in the short run because we’ve still got a troubled housing market,” said Robert Van Order, co-author of the study and a finance professor at George Washington University. “But over the next few years, the loan limit should go down to where it used to be.”

For years, the FHA loan limit was capped at $362,790 in pricey areas.

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After examining loan data collected by the government, the report found that 95 percent of both African American and Hispanic borrowers took out FHA mortgages of less than $300,000. “Thus loan limits beyond this size are not necessary to serve first time and minority borrowers,” who are the FHA’s core constituency, the report said.

FHA officials declined to comment in advance of the administration’s proposal, but they have previously said that 60 percent of black home buyers, 61 percent of Hispanic home buyers and roughly 30 percent of first-time buyers used FHA-insured loans in 2009.

In every part of the U.S., FHA borrowers can currently take out a loan for at least $271,050. But the report concluded that even that floor is too high, given that the average national price of a home is $177,000.

 


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