The Federal Housing Administration looks poised to replace Fannie Mae and Freddie Mac
as the primary government lender of relatively high-cost mortgages.
The government recently passed a bill that extended the agency's conforming loan limit to $729,750 in the country's most expensive neighborhoods, while keeping Fannie Mae and Freddie Mac's ceiling at $625,500, the level to which it fell after Congress allowed a previous $729,750 loan limit to expire on Oct. 1. This probably means that relatively well-off homebuyers will increasingly turn to the FHA in order to help finance mortgages in high-cost areas, concludes columnist Kenneth R. Harney.
The decision by Congress to raise loan limits solely for FHA-insured loans, and not for Fannie Mae or Freddie Mac-backed loans, reflects the government's growing displeasure with the two mortgage giants (which back roughly half of all mortgages in the U.S.) and its desire to reduce their role in the housing market.
Unlike Fannie Mae and Freddie Mac, the "FHA has never encountered any ingrained hostility from lawmakers," Jack Guttentag, professor of finance emeritus at the Wharton School, told AOL Real Estate
What has probably saved the agency from Congressional disapproval is that it never waded into the toxic waters of the subprime mortgage market. While Fannie Mae and Freddie Mac bought up loads of toxic mortgage-backed securities, the FHA only insured loans that met its staid standards (which were relatively high compared to loans that some subprime lenders were making).
As a result, the FHA has not required any taxpayer assistance, even as Fannie Mae and Freddie Mac continue to run up a bailout tab that so far has exceeded $100 billion.
The FHA was formed in 1934 to revive the Depression-ravaged housing market by insuring loans for banks. Until now, the FHA has insured the loans of mostly low-income homebuyers and over the years has continually met the expectations of Congress, "which was always: Provide financial help to lower income people," Guttentag said.
But the FHA's recently extended loan limits allow the agency to insure loans that run as high as 125 percent of a market's median home-sale price, while Fannie Mae and Freddie Mac may only back mortgages that run up to 115 percent of the median home-sale price. That means the FHA may continue to break from its legacy and finance more higher-income borrowers.
Even though the FHA boasts an encouraging track record of financial stability, recent reports suggest that it too may soon end up costing taxpayers. In fact, prior to receiving the loan limit extension, the FHA already faced nearly a 50 percent chance
of needing government assistance, according to The New York Times
. The agency's cash reserve is reportedly less than one-quarter of a percentage point of its total assets, even though the agency is legally obligated to keep that number at 2 percent.
Could extending higher conforming loan limits increase the FHA's risk of a bailout?
Not really, Guttentag argues. Since the FHA will use the same loan-to-value ratio requirements for expensive mortgages, and scale insurance rates to loan amounts, the agency won't assume a higher risk of losses.
"The implications for the reserve account are zilch," he said.
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