The FHA has been in the headlines a lot recently. So have assertions regarding how large of a presence the institution has in the housing market. The FHA’s significance varies based on which benchmark you are measuring it next to; the total sales market, the purchase mortgage market, or the mortgage insurance market. But by whichever measure, the FHA’s role is on the decline. Regulatory changes to the secondary market must first take place, though, for the FHA to withdraw to its historic position.
How to Measure the FHA’s Market Share
The FHA insures mortgages made by private lenders so long as they pass certain quality standards. One means of assessing the size of the FHA’s role in the market is to measure the share of FHA’s purchase endorsements relative to total home sales (new and existing). This method has the advantage of excluding refinances, which are a smaller component of the FHA’s business. The FHA’s role in this total market peaked in 2010 at 24.6%, well above the pre-boom period when it averaged roughly 13%. The FHA’s share of this market has eased in recent years touching 14.6% in 2012. However, the count of new sales does not include condominiums making for an unclear comparison. Furthermore, a large portion of the total existing home sales market has been cash sales in recent years, so this measure may understate the FHA’s role.
A second way to view the FHA’s impact on the market is to look at its share of mortgage originations. This approach excludes cash sales. In the FHA’s most recent annual report to Congress, a chart (below) was published that makes this comparison [1]. As of the 3rd quarter of 2012, the FHA’s share of the purchase mortgage market was roughly 26%, down from a peak of 39% in the 4th quarter of 2009. Unfortunately, the chart only begins in 2003 when the housing boom was in full swing, so we can’t view the period prior to this distortion. Because one of the FHA’s main focuses is on providing credit access to first-time buyers, the FHA’s share of the refinance market, also depicted below, is much smaller.
As discussed earlier, the FHA provides mortgage insurance on mortgages originated by lenders. Consequently, a more appropriate measure might be to look at the FHA’s role relative to the universe of loans that carry mortgage insurance. The FHA’s role in this market eased from 2000 to 2006 as private mortgage insurance companies expanded into the credit-impaired portions of the market traditionally served by the FHA. However, private mortgage insurers’ share of the market plummeted between 2007 and 2009 as exploding default rates on their books of business forced them to take on more conservative underwriting standards. Despite higher average FICO scores in the subsequent years’ books of business and the same documentation and underwriting that lost the FHA market share during the boom, the FHA’s role expanded, peaking at 75% in 2010 during the 1st time buyer tax credit before easing to 45% in 2012.
A similar, though less dramatic pattern is seen when calculating market shares of the mortgage insurance market based on the number of policies written rather than by the dollar value of the policies. This is the methodology used by the General Accounting Office. Since the FHA does not operate in the jumbo sphere, private mortgage insurers’ role is larger when viewed by dollar volume of policies written. Still, the market share for private mortgage insurance calculated based on unit volume rose from 14.0% in 2010 to 19.5% by September of 2012. Conversely, the FHA’s market share eased from 71.6% to 56.7% over this same time frame. The VA gained in share over this period.
No matter how you measure it, the FHA’s role expanded tremendously in the wake of the housing bust. Recent changes have helped to foment modest gains in the private sector. However, fundamental changes involving transparency and investor trust will have to be overcome before the private sector will be fully restored.
Restoring the Role of the Private Sector
In an attempt to more rapidly eschew the private market back into its robust traditional role in mortgage finance, the FHA has instituted a number of increases to both its annual mortgage insurance premium and its upfront mortgage insurance premium. The annual mortgage premium charged on 30-year mortgages with downpayments less than 5% increased from 0.55% in 2010 to 1.25% in 2012 unless the loan was for more than $625,000 when it rose to 1.5%. These rates are set to rise further from 1.25% to 1.35% later in June. The result was the increase in the private mortgage insurance market since 2010 noted above.
The resurgent role of private mortgage insurers was also evident in the Federal Reserve’s annual report on data published as part of the Home Mortgage Disclosure Act [2]. The data show the number of private mortgage insurance policies rising for both purchases and refinances, but a significant 25% increase in purchase policies between 2010 to 2011 despite the end of the $8,000 tax credit for homebuyers.
This shift back to the private market highlights the FHA’s cyclical role in the housing market. During periods of economic recession (in yellow below) when the private sector (purchase and refinance) has withdrawn, the FHA expanded to fill the credit gap. With recovery of the economy, the FHA’s role eased giving way to the private sector.
Efforts to make the private market more competitive through higher fees at the FHA have paid modest dividends. However, down payments on conventional loans have risen in recent years as have upfront charges for loans financed by the GSEs (called loan level pricing adjustments) and representation and warranty risks, while investors have shown little appetite for private, high-LTV securitizations. The risk weighting scheme of Basel III could also hinder banks from making low down payment mortgages. Consequently, raising costs on savings-impaired home buyers without a viable private alternative will eventually price them out of the market.
Lenders received clarity on new origination standards with the release of the qualified mortgage rule (QM) in January. But fundamental changes to the structure of the secondary mortgage market are necessary before the role of the private market can be fully restored. Both the government and private sector issue mortgage backed securities (MBS), which are bundles of mortgages sold to investors. Investors in privately-issued mortgage backed securities (PLS) experienced severe losses during the housing bust and questions have been raised about the quality of loans in the securities. As a result, since the housing downturn investors have favored MBS backed by Ginnie Mae, Fannie Mae or Freddie Mac because of the government guarantee and stronger underwriting and transparency. This need to restore investor confidence is at the heart of the qualified residential mortgage (QRM) rule, which is to be decided later this year. Restoring investor demand is critical to strengthen the private sector.
The housing market experienced broad swings over the last decade and the FHA’s role fluctuated in response. Since 2011, the private market has experienced modest gains, but to fully restore its role in the market, lender and investor confidence must also be reestablished through balanced regulatory changes.
[1] http://portal.hud.gov/hudportal/documents/huddoc?id=F12MMIFundRepCong111612.pdf
[2] http://www.federalreserve.gov/pubs/bulletin/2012/PDF/2011_HMDA.pdf