FHA to pull back on big mortgages

home for sale

The Federal Housing Administration has announced plans to reduce its stake in the market, an indication it sees some signs of strength in real estate.

The agency, which insures low down-payment mortgages, is reducing the upper limits of what it will backstop in areas where home prices are high.

Starting in the new year, the biggest cap in these areas will drop to $625,500 from $729,750. Limits will be set lower in about 650 counties as a result, the agency said.

The FHA will maintain current limits in areas where home prices are lower and said the move will allow it to refocus on less wealthy homebuyers.

Related: What you could pay for a dream home

The agency stepped in amid the housing market meltdown -- which was at the core of the 2008 financial crisis -- and raised limits so it could help more homebuyers. The FHA said the program quadrupled its activity "as the private market retreated."

But by doing so, it took also significant hits from defaults, and the agency has been trying to right its own balance sheet.

The agency was forced to ask Congress for $1.7 billion in late September, and has hiked premiums. Several years earlier, the government took over housing giants Fannie Mae and Freddie Mac.

Related: Five most affordable housing markets

FHA Commissioner Carol Galante said the new changes are "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."

Zillow CEO: Hottest housing markets
Zillow CEO: Hottest housing markets

The agency does not make home loans, but insures lenders against losses, allowing buyers who can afford as little as a 3.5% down payment to receive a mortgage.

The FHA says it currently has nearly 5 million mortgages in its portfolio.

Find Homes For Sale


CNNMoney Sponsors