Evidence on the Decline of FHA

Abstract

THE HOME MORTGAGE default insurance programs of the Federal Housing Administration (FHA) have experienced increasing difficulties in recent years both in maintaining an adequate volume of program activity and in achieving the legislative objective of actuarial soundness. The most seriously aSected has been the unsubsidized Section 203 program, which is the oldest and, by far, the largest in the FHA insurance system. As shown in Figures 1 and 2, the number of insurance contracts written on new and existing units under this program declined more than 50 percent over the decade of the late 1960s and early 1970s. These developments are now providing the catalyst for a fundamental reexamination of the federal government's role in the market for unsubsidized home mortgage default insurance that is likely to result in major policy changes over the next several years. Clearly, the basic thrust of these changes should be largely determined by the nature of the causal forces that have led FHA to its current position. The purpose of this note is to examine the FHA decline empirically in order to shed some light on the relative importance of the various causes of decline. In so doing, our primary attention will be focused on the issue of whether