From Minor to Major Player: The Geography of FHA Lending During the U.S. Mortgage Crisis

Abstract

At various points in its history, the Federal Housing Administration (FHA) has had particularly large impacts on mortgage and housing markets in the U.S. During the early to middle 2000s, FHA lending dwindled to historically low shares of the mortgage market as subprime lending boomed, with some questioning the need for the agency’s continued existence. After the subprime crisis in 2007 and pullbacks by conventional lenders, however, FHA lending surged, reaching approximately forty percent of home purchase lending by the end of 2008, a level not seen since World War II. This paper examines the differences in FHA activity across large U.S. metropolitan in late 2008, a peak period of the crisis. It then estimates a loan-level model of FHA versus conventional lending. Factors that affect the likelihood of a loan being an FHA rather than a conventional loan include loan-to-value ratio, credit score, housing price trends, neighborhood demographics, and a variety of other factors. After controlling for these and other variables, loans in zip codes with larger African-American populations are found more likely to be originated as FHA loans. Policy implications of this and other findings are discussed.