3. FHA Lending
FHA Lending Patterns Nationally and in the Third District States (27 pages, 858 KB)
In recent years, the FHA has experienced dramatic changes. The FHA’s market share stood at about 10.5 percent in 2000, then fell sharply over the first part of the decade, to about 3 percent in 2005 and 2006. Although total volume initially grew from 841,531 loans in 2000 to 1,184,731 loans in 2003 as the number of FHA-to-FHA refinances surged in response to low interest rates in the early part of the decade, it plunged thereafter, reaching a low of 387,548 loans in 2006. (That FHA market share fell at the beginning of the decade even as its loan count was rising reflects the expansion in scale of originations in the market as a whole, including, perhaps, a greater use of second liens in the non-FHA portion of the market.) FHA lending by dollar amount followed similar patterns over the period in terms of both volume and share (Tables 4 and 5 and Chart 7).
With the start of the housing crisis in 2007, this pattern reversed. In contrast to originations in the market as a whole, FHA loan originations increased in both total number and total dollar amount that year, and the FHA’s market share increased as well. A further sharp increase in originations occurred in 2008, to more than 1.24 million, a level of FHA originations somewhat higher than loan counts between 2001 and 2003, and to a total dollar amount of $215.7 billion, also a new high for the decade. Market share rose to 17.6 percent. In 2009, growth in FHA loan origination continued. The total number grew year over year by 46.6 percent, to more than 1.8 million – once again, a new high for the decade – and total dollar amount grew by 53.9 percent, to $331.9 billion. As of 2009, the FHA’s market share of mortgage originations was approximately 21 percent by loan count and 18.5 percent by dollar volume.
The rise and fall and rise of FHA lending in the past decade is a reverse image of the picture in the subprime segment of the market, where market share rose sharply rose sharply in 2003 but collapsed in 2007.5 The loss of FHA volume and share in the years when subprime lending was strongest may be related to the relatively greater ease of obtaining subprime loans. This greater ease was a result of the lower underwriting standards in the subprime sector and the relatively cumbersome process for obtaining FHA loans, especially until 2005, when FHA processes were streamlined. (Ceilings on FHA loan amounts that did not keep pace with housing price appreciation in some parts of the country also made it difficult to use the FHA in those areas.) In the wake of the subprime collapse and the associated tightening of lending criteria in the mortgage market overall, the FHA has likely attracted not only borrowers with characteristics similar to borrowers the FHA lost to the subprime market earlier in the decade, but also borrowers who might have received prime loans in the past but for whom the FHA is currently a better option.
In each year of the past decade, the FHA’s share of purchase loans was greater than its share of all loans, not surprising for a program typically thought of as a purchase program (Table 4).6 However, the FHA’s purchase segment experienced much the same pattern of decline and recovery over the past decade as did FHA loans in total, albeit with some differences in the details. (See Table 6 and Chart 8.) In 2000, there were 772,767 FHA purchase originations, a 16.4 percent share of all purchase originations by loan count. Total dollar amount and share were $80.8 billion, and 13.1 percent, respectively. By 2006, purchase originations had fallen 35.7 percent from the 2000 level, to 275,724, and the FHA’s share of purchase loans was 4.1 percent. (Unlike total FHA lending, FHA purchase lending did not experience an increase in volume early in the decade; the increase in total volume was driven by refinance activity, discussed below.)
While the pattern for overall lending turned around in 2007, FHA purchase loan originations by loan count increased only marginally that year, by 1 percent. (However, total dollar amount increased by 8.7 percent over 2006. In addition, purchase share increased as purchase originations in the non-FHA segment of the market continued to fall from their decade high in 2005.) In 2008, however, FHA purchase originations jumped to 756,353 by loan count and to $128.8 billion in total dollar amount, 226.5 percent, and 171.6 percent over their 2007 levels, while the FHA’s share of purchase originations rose to 24.7 percent by loan count and to 19.9 percent by dollar volume, considerably higher than at the start of the decade. The next year, 2009, showed further increases in both loan count and dollar volume. (For example, purchase count rose to slightly more than 1 million loans, a year-over-year increase of 34.1 percent). The FHA’s share of all purchase originations by total number was 36.7 percent in 2009, while its dollar share stood at 32.1 percent.
While the FHA has traditionally been thought of as a purchase program, it also originates refinance loans, which may be either refinances of conventional loans to FHA or FHA-to-FHA refinances. FHA refinance loans had a smaller share of all refinance originations in each year of the past decade than the FHA’s share of all loans and, in all but one year, represented a smaller part of the FHA’s overall volume than did FHA purchase loans (Tables 4 and 7). Nonetheless, at a number of points in the decade they made up a substantial percentage of FHA loans.
The pattern in FHA refinance originations is somewhat different from that for FHA home purchase originations. (See Table 8 and Chart 9.) In 2000, there were only 57,027 FHA refinance originations by number and $6.1 billion in total FHA refinance originations by dollar amount. From 2001 through 2003, FHA refinance originations grew sharply, perhaps as a result of a low interest rate environment, and reached 590,851 and $70.3 billion. Additionally, a change in refinance regulations contributed to the large number of refinance loans in 2003.7 In that year, the number of FHA refinance originations was higher than FHA purchase originations, according to HMDA data. (From 2001 to 2003, the FHA’s share of all refinance originations also grew slightly, averaging 4.2 percent in total number and 3.2 percent in total dollar amount in comparison to a share in 2000 of 2.4 percent of total number and 2.5 percent of total dollar amount.)
Like all refinance activity, FHA refinance originations plunged in 2004, to 208,679, a 64.7 percent decline from the previous year. Because FHA refinance activity fell at a faster rate than refinance activity in the market as a whole, the FHA’s refinance market share also fell, to 2.8 percent of total loan amount and to 1.8 percent of total dollar amount. The FHA’s refinance activity remained relatively flat until 2007, when an increase in refinance activity fueled a reversal in the trend in overall FHA volume at the start of the housing crisis. Refinance volume then increased sharply in 2008 and 2009. In 2008, refinance activity grew to 474,766 in total number and to $85.3 billion in total dollar amount, representing 13.8 percent of total refinance by number and 12 percent by total dollar amount. In 2009, FHA refinance originations increased year over year by 70.9 percent in total number, to 811,325, a decade high level for FHA refinance originations, and total dollar amount increased by 85.1 percent year over year, to $157.8 billion, representing 14.3 percent of refinance loan count and 12.9 percent of refinance dollar amount, respectively. It is noteworthy that at the beginning of the decade, FHA refinance activity was more likely to be FHA-to-FHA, while conventional to FHA refinance activity has been more prevalent since the start of the 2007-2009 housing crisis, a point that will be discussed further in a subsequent report on FHA delinquencies.
Continues on Next Page