This week (July 11) hundreds of Realtors® are flying in to Washington, D.C. to engage in a "full court press" lobbying effort on behalf of the National Association of Realtors®’ (NAR) legislative agenda.

These concerns include: preservation of the mortgage interest deduction, extension of the national flood insurance program, reform of Fannie Mae and Freddie Mac, and preservation of the current maximum loan limits for Fannie, Freddie, and FHA.

The argument for maintaining the FHA maximum loan levels is especially compelling. To press it, however, the Realtors® will need to counter positions that have been taken by those who advocate shrinking FHA’s role in the real estate financing arena. There are three areas of contention: 1. The proper role of FHA; 2. The potential impact of scaling back FHA’s ability to lend; and 3. The risk level of FHA loans. We consider each of these.

1. In February of 2011 the Administration delivered to Congress a document titled, Reforming America’s Housing Finance Market. Therein it laid out its plans and rationale for effecting major changes for real estate financing in America. A specific goal of the program is to shrink FHA’s market share. This is justified on the grounds that FHA is functioning beyond its "traditional role." "…FHA should return to its pre-crisis role as a targeted provider of mortgage credit access for low- and moderate-income Americans and first-time homebuyers. (Today, FHA’s market share is nearly 30 percent, compared to its historic role of between 10 – 15 percent.)"

It appears, though, that the Administration report may not have accurately stated the traditional, or even primary, role of FHA. A January 28, 2011 article in the Journal of Urban Affairs puts it this way, "Since its creation in 1934, the FHA has played important and varied roles in the development and maintenance of U.S. mortgage and housing markets. These include serving as a lender of last resort when conventional lending markets falter and as a force for regional housing market stabilization."

The article goes on to point out:

• In 1937, the FHA participated in 45% of all housing starts in the United States.

• From 1935 to 1939, FHA-insured loans accounted for 23% of all single-family mortgage lending.

• This share grew to 45% during the years 1940 to 1944.

• In 1950, the agency accounted for 35% of housing starts.

• In 1970, FHA loans accounted for almost 30% of single-family loans.

• Throughout most of the 1990s, the FHA share of purchase loans held relative steady in the 15% to 20% range.

To suggest that FHA’s current level of participation in the market is somehow out of its historic role is simply a misrepresentation.

2. Advocates of lowering FHA’s lending limits argue that it would actually have little impact on the market. A May 26, 2011 report from H.U.D. (Department of Housing and Urban Development) says that only 669 of 3,334 counties or county equivalents (about 20%) would be affected.

While it is true that only 20% of U.S. counties would be affected, it is important to note, as a June 1, 2011 N.A.H.B. (National Association of Home Builders) points out, "these counties include significant concentrations of population and housing… In fact, the affected counties contain 44.3 million owner-occupied housing units … 59% of all owner-occupied housing in the U.S." Lowering the loan limits would make approximately 12.2 million homes (16%) ineligible for FHA financing.

Under every scenario, non-FHA financing will be costlier (both in terms of down payments and interest rates) than FHA. Higher financing costs simply translate into lower housing prices. Lowering the FHA limits would negatively affect the value of roughly 16% of the housing stock: Hardly what an-already fragile market needs.

3. It is also argued that FHA involvement in the market should be reduced because FHA loans, with lower down payments and lower credit score requirements, pose substantially greater risk of delinquency and default. While this has initial intuitive appeal, it turns out not to be correct.

The Journal of Urban Affairs article cited earlier points out that, using data from the housing bubble period, "FHA foreclosure rates were far lower than subprime foreclosure rates both prior to and during the mortgage crisis.

FHA delinquency rates were lower than those of subprime mortgages; but how do they compare with standard mortgages? Currently (May, 2011) LPS (Lender Processing Services) reports a 7.96% delinquency rate, down from 9.74% a year ago. The FHA Mutual Mortgage Insurance Fund quarterly report (FY 2011 Q2) to Congress shows "The seriously delinquency rate for the single-family portfolio at the end of Q2 2011 is 8.31 percent. This is substantially lower than the 9.05 percent rate observed one year earlier."

Yes, the FHA delinquency rate is worse than delinquencies overall, by less than one-half of one per cent! Moreover, the FHA mortgage insurance premium has been raised twice in the past three years. Worries about greater risk with FHA are exaggerated.

FHA has had an important, probably crucial, role to play in helping to stabilize the housing market. It would be a serious error to diminish that role by scaling back its lending capacity. We have to hope the Realtors® can make this case to Congress.

Published: July 12, 2011

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Bob Hunt is a former director of the National Association of Realtors and is author of the recently published book, "Real Estate the Ethical Way." A graduate of Princeton with a master's degree from UCLA in philosophy, Hunt has served as a U.S. Marine, Realtor association president in South Orange County, and director of the California Association of Realtors, and is an award-winning Realtor. Contact Bob at .