NEW YORK (TheStreet) -- The Federal Housing Administration will reduce the size of loans it backs in high-cost areas beginning January 2014 as it moves to scale back its role in a recovering housing market, the agency said late Friday.
The ceiling on loans for single-family homes in highest cost areas will drop to a maximum of $625,500 from $729,750, effective Jan. 1. The current standard loan limit will remain unchanged at $271,050.
"As the housing market continues its recovery, it is important for FHA to evaluate the role we need to play," said FHA Commissioner Carol Galante. "Implementing lower loan limits is an important and appropriate step as private capital returns to portions of the market and enables FHA to concentrate on those borrowers that are still underserved.
The FHA insures lenders against losses on loans with downpayments as low as 3.5%. The share of FHA-backed loans surged in the wake of the crisis when private capital disappeared.
The agency increased the limits on loans it backs under the Housing and Economic Recovery Act passed in 2008. The limits were scheduled to drop in 2009, but Congress delayed implementation of the lower limits amid concerns about tight credit conditions.
Critics of the higher loan limits had argued that the FHA has deviated from its purpose of serving lower-income borrowers.
About 650 counties will now have lower loan limits as a result of this change.
-- Written by Shanthi Bharatwaj in New York