On Tuesday, the Department of Housing and Urban Development (HUD) released its annual report on FHA issues to Congress. Among other things, the report stated that FHA loans accounted for nearly 40 percent of all purchase mortgages, for the period of November 2009 – November 2010.
The Ups and Downs of FHA Market Share
In 2005, the FHA’s market share of purchase loans was closer to 5 percent (when measured by households served). So they are clearly insuring more loans today than just a few years ago. But if we go back even further, we can find a similar pattern. In 1993, FHA’s slice of the purchase-loan mortgage market was around 15 percent.
So what’s really going on here?
For the most part, the FHA’s market share has followed the alternating trends of relaxed and restricted lending. Whenever financial side-doors open up for people with bad credit and no money down, FHA’s market share goes down. When those doors close again, FHA loans become more popular.
This is what we saw in the late 1990s and early 2000s. Remember, this was the period when all of those “exotic” mortgage loans came into use — most of which are now extinct. The stated-income loan, the subprime mortgage, etc. “So long FHA. We don’t need you anymore. There’s a new game in town.”
But now that most of those high-risk (and low intelligence) mortgage products are gone, it’s a love affair with FHA loans once again.
By this time next year, FHA loans could easily account for more than 50 percent of all purchase mortgages. Our consumer research is already pointing toward this kind of usage spike. Time will tell.
FHA Loans 2.0 – They Aren’t “Easy” Anymore
Of course, even the FHA has limits to what it will do, in terms of lending. Over the last few years, the government agency suffered huge financial losses resulting from defaults and foreclosures. The so-called “seller-financed down payment assistance” mortgages cost the FHA more than $6 billion dollars in claims.
So the organization’s leaders took a step back to review their mortgage-insurance criteria. As a result of this review, there have been a number of changes to the FHA loan program. Borrowers today will need larger down payments (3.5 – 10 percent) and higher credit scores.
The FHA is also taking steps to restore its capital reserves. During the housing-market crash, those reserves fell below the 2-percent mark that is required by congress. They are restoring capital largely by requiring higher mortgage-insurance premiums over the term of the loan.
About the FHA: The Federal Housing Administration (FHA) is part of the federal government, under the Department of Housing and Urban Development (HUD). This agency insures mortgage loans made by FHA-approved lenders in the primary mortgage market. They insure loans against default, which increases the lender’s willingness to lend. Since its inception in 1934, the FHA has been the largest insurer or mortgage loans. Learn more