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5. Conclusion and Implications
FHA Lending Patterns Nationally and in the Third District States (27 pages, 858 KB)
This report provides useful background for gauging the quality and performance of the 2006 through 2009 borrower cohorts in the FHA program nationally, as well as in Pennsylvania, New Jersey, and Delaware. In recent years, with the growth of the FHA portfolio as the housing crisis took hold, and with the accompanying rise in delinquency rates, concerns about the continued sustainability of the FHA program have developed. However, while the growth of the FHA’s portfolio presents risks to the program, the data presented here on borrowers’ mean credit scores would suggest that the credit profiles of recent borrowers are an improvement over those during the worst years of the housing crisis. Borrower quality, as measured by average cohort credit scores, was superior for FHA cohorts compared with subprime cohorts even during the subprime heyday, and for FHA’s 2009 cohort, the mean credit score was in traditional prime territory.
However, the findings in this report do not suggest that concerns about FHA performance are unwarranted or that diligence in monitoring this performance is not necessary. Given the large market share of the FHA portfolio,21 persistent high unemployment, and the possibly changing role of the FHA program as the housing market stabilizes, continued timely monitoring of the program’s borrower quality and loan performance is crucial.
The findings presented here are interesting for other reasons as well. First, they suggest that borrower credit quality is not all that matters for performance of the FHA program. For example, while credit quality, as indicated by credit scores, appears to be stronger in 2008 than in 2006, loan performance at the 12-month point was about the same in 2008 for purchase loans but was actually worse in 2008 for refinance loans. This suggests that other factors play a role as well; it is likely that unemployment rates and housing market conditions were major factors affecting the comparative performance of these cohorts. In addition, the data presented for the Third District states show that the national performance numbers for the FHA portfolio do not necessarily apply to local areas and, furthermore, that even in a relatively small geographic area, such as the Third District states, performance can vary considerably, presumably because of differences in local housing markets and economic conditions.
How the performance trends of the FHA program will develop over the long term, after the housing crisis has abated, remains to be seen. As in the past, it is likely that long-term economic trends — in particular, unemployment — and the performance of the housing market will affect that performance. As the housing crisis fades and the recovery plays out, the FHA program will continue to be an important topic for economic research for those who seek to understand the functioning of the housing market.
Department of Housing and Urban Development. “FHA Issues Annual Financial Status Report to Congress,” HUD Press Release (November 17, 2010); available at http://portal.hud.gov/hudportal/HUD?src=/press/press_releases_media_advisories/2010/HUDNo.10-252 .
Federal Housing Administration. “MMIF Programs Quarterly Report to Congress for FY 2010 Q4,” (March 2011); available at http://www.hud.gov/offices/hsg/rmra/oe/rpts/rtc/fhartc_q4_2010.pdf .
Federal Housing Administration. “Annual Management Report Fiscal Year 2009,” (2009); available at http://www.hud.gov/offices/hsg/fhafy09annualmanagementreport.pdf .
Federal Housing Administration. “Annual Report to Congress Regarding the Financial Status of the FHA Mutual Mortgage Insurance Fund,” (November 12, 2009); available at http://online.wsj.com/public/resources/documents/FHAInsuranceStatus1112.pdf .
Federal Reserve Bank of Philadelphia. “The Quality of FHA Lending in Pennsylvania, New Jersey, and Delaware,” FRB Philadelphia Community Development Special Report (2011); available at http://www.philadelphiafed.org/community-development/publications/special-reports/FHA-lending-activity/index.cfm .
Newburger, Harriet B. “FHA Lending: Recent Trends and Their Implications for the Future,” Federal Reserve Bank of Philadelphia Community Development Discussion Paper (forthcoming).
Timiraos, Nick. “Housing Agency Reserves Fall Far Below Minimum,” Wall Street Journal. (November 13, 2009); available at http://online.wsj.com/article/SB125805015607445691.html .