The Federal Housing Administration has moved into uncharted, risky territory over the last few years as its market share and focus on higher balance mortgages has risen sharply, says a new study released by the George Washington University School of Business.

The report, "FHA Assessment Report: The Role and Reform of the Federal Housing Administration in a Recovering U.S. Housing Market," was released earlier this month by the school's Center for Real Estate and Urban Analysis. Robert Van Order, professor of finance, and Anthony Yezer, professor of economics, co-authored the report.

The report recommends that FHA revert back to its traditional role: helping first-time and low- to moderate-income homebuyers purchase homes, allowing the private sector to shoulder more of the risk associated with insuring larger loans.

Specifically, the report finds that the 2008 expansion of FHA's loan limits gives it the ability to insure nearly 90 percent of the available low down-payment market. As a result, FHA's share of the home purchase market ballooned from about 6 percent in 2007 to more than 56 percent in 2009. The report finds that loans valued at the highest levels—more than $350,000—perform about 20 percent worse than smaller loans that are within FHA's historical scope.

"Without question, FHA played a major role in keeping the housing market afloat during the economic collapse of 2008 and 2009, and we need to be careful about cutting back too rapidly," says Van Order, who is chairman of the school's real estate center. "However, these large loan sizes are unlikely in the long run to assist FHA in reaching its historical constituencies. Our research indicates that larger loans are likely to perform worse than FHA's traditional market, and we are concerned that the rapid increase in FHA's market share will be hard to manage."

The report analyzes FHA's loan limits, observing that they have risen rapidly since the credit crunch began. In 2006, FHA could insure loans of up to $362,790 in the higher-cost markets. In response to the 2008 housing crisis, FHA loan limits were revised to insure loans of up to $729,750 in higher-cost markets. Congress extended these pre-crash limits through 2011, while median home prices have significantly declined.

Finally, the report finds that 95 percent of both African-American and Hispanic borrowers selecting FHA mortgages had loan amounts under $300,000. Thus, loan limits beyond that size are not reaching minority borrowers.

Numerous administration officials within the U.S. Departments of the Treasury and Housing and Urban Development have expressed their commitment to allow the return of more private capital to the market. The report offers several possible policy actions to accomplish this objective and reduce FHA's market share. Those actions include reverting back to using the current area median home price, rather than the 2008 figure, as the basis for its regional limits and reducing the high and low end of FHA's loan limits.

This report is the first installment of the GWU real estate center's FHA Assessment Report, which is designed to analyze and interpret reforms to FHA that are under way, as well as other changes that may be considered in the future.