Temporary Loan Limits as a Natural Experiment in FHA Insurance
Section 203 of the National Housing Act of 1934 created the Federal Housing Administration (FHA) to provide federally backed insurance of home mortgages against the risk of default. FHA insurance typically serves borrowers with higher perceived credit risk, including first-time homebuyers and minority borrowers. FHA is also restricted to loan amounts less than a maximum limit. Historically, these loan limits have tended to not keep pace with house price appreciation, further focusing FHA insurance on a narrowing segment of the mortgage market. But in response to the collapse of house prices and rising foreclosures, Congress enacted legislation in 2008 that drastically increased the maximum loan amount eligible for FHA insurance. Although subsequently extended, the higher loan limits expired at the end of 2013. The changes in loan limits create a natural experiment to measure the effect of the availability of FHA mortgage insurance on the mortgage market. The exogenous variation in FHA eligibility provides an improvement over previous research on the substitution between FHA and conventional (i.e., not insured by the Veterans Administration, Department of Agriculture, or FHA) mortgage lending.