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Effects of FHA Loan Limit Increases by ESA 2008: Housing Demand and Adverse Selection

57 Pages Posted: 6 Jan 2017  

Min Hwang

George Washington University - Department of Finance

Chen L. Miller

George Washington University - Department of Finance

Robert A. Van Order

George Washington University

Date Written: August 3, 2016

Abstract

This paper examines the impacts of changes in the Federal Housing Administration (FHA) insured loan limit in response to the Economic Stimulus Act (ESA) of 2008. We use difference-in-difference approaches to compare the number of transactions and average loan-to-value ratios for properties located in high-cost areas and low-cost areas, before and after the ESA policy change. We find that the increase in loan limits does results larger demand for FHA loans, both in quantity and quality. However, the behavior is not driven by incentives to buy more housing or by wealth constraints. We find evidence of increased moral hazard in the sense that increased loan limits induced riskier borrowers (allowed “cherry-picking” against FHA), and that much of the increased demand for FHA loans came at the expense of other loans. For instance, newly qualified borrowers, especially via cash-out refinance loans, are more likely to take advantage of increased loan limit policy, and adjust their LTVs. Also, newly qualified loans had higher default rates and higher loss given default rate.

Keywords: FHA, housing demand, loan limit, adverse selection, ESA

JEL Classification: G21, G22,G28

Suggested Citation

Hwang, Min and Miller, Chen L. and Van Order, Robert A., Effects of FHA Loan Limit Increases by ESA 2008: Housing Demand and Adverse Selection (August 3, 2016). Available at SSRN: https://ssrn.com/abstract=2789620

Min Hwang

George Washington University - Department of Finance ( email )

2023 G Street
Washington, DC 20052
United States

Chen L. Miller (Contact Author)

George Washington University - Department of Finance ( email )

2023 G Street
Washington, DC 20052
United States

Robert A. Van Order

George Washington University ( email )

2121 I Street NW
Washington, DC 20052
United States

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