Federal Housing Administration Loans Research Articles

Peer-to-Peer Lending as a Determinant of Federal Housing Administration-Insured Mortgages to Meet Sustainable Development Goals

In this paper, we investigate the influential factors of Federal Housing Administration (FHA) mortgage loans, focusing our research interest on peer-to-peer (P2P) lending, the most successful FinTech lending model. We consider P2P lending an alternative source of financing that marginal borrowers use to pay the increased mortgage down payment, making them eligible to receive a mortgage from conventional banks. In other words, we examine whether and to what extent P2P lending has a positive impact on the FHA loans volume by providing the ability to circumvent the loan-to-value (LTV) cap policy. As a result, P2P lending can be seen as a means for ”rationed” borrowers to have access to the market by reducing inequalities and promoting financial inclusion, thus achieving Sustainable Development Goals (SDGs). We employ hand-collected data from FHA mortgages, P2P loans, and other economic factors from all 50 U.S. states during 2007–2017 and use panel data techniques for this purpose. Research shows that P2P lending, GDP per capita, population growth, broad money growth rate, interest rate, unemployment rate, new housing units, and consumer confidence Index produce effects on FHA loans. We show that P2P lending, a nonconventional determinant, is causally associated with a significant increase in the count and volume of FHA loans, implying that P2P lending has a positive impact on them. The ability of P2P to bypass mortgage supply constraints (tightened LTV caps) by providing small loans to borrowers to meet the increased down payment requirements is very important to policy-makers, as it shows that constraining the volume of mortgage loans may be not achieved. Macroprudential tools designed to control credit growth may prove ineffective, as the use of alternative forms of lending helps circumvent them and ultimately leads to excessive household leverage with all the risks that it poses to the financial system.

Where Did Redlining Matter? Regional Heterogeneity and the Uneven Distribution of Advantage

This article analyzes the regional variation in outcomes of a seemingly standardized federal neighborhood valuation principle used in home mortgage insurance grading. The objective is to highlight the contingent discriminatory and economic conditions that mediated heterogeneous housing outcomes across different parts of the United States. How did city and regional economic and demographic growth patterns vary before and during the mortgage insurance program implemented through the Federal Housing Administration (FHA)? How might this have shaped loan guarantee patterns? How does preexisting racial housing discrimination relate to outcomes? Adopting an orientation that centers on Whiteness and the benefits of mortgage finance for certain groups and neighborhoods, this analysis uses a Bayesian hierarchical framework to investigate the degree of the FHA’s influence between 1940 and 1970, here proxied by the Home Owners’ Loan Corporation maps, on A or B (“AB”) graded neighborhoods versus C graded neighborhoods in different cities. This article studies how home values and homeownership change over time and whether there are regional variations in the influence of these grades. It also studies what longitudinal socioeconomic patterns might explain the persistence or decline of the AB effect over time. Findings show cities in the West Coast, Southwest, and northern central United States that saw the most housing construction also had the highest proportions of FHA loans to overall dwelling units. There is also a distinctive consistency and persistence of benefit on home value and homeownership to AB graded neighborhoods in these cities, possibly owing to regional shifts in the industrial landscape.

Legacies of Institutionalized Redlining: A Comparison Between Speculative and Implemented Mortgage Risk Maps in Chicago, Illinois

ABSTRACT How did institutionalized discriminatory lending policies implemented under the guidance of the Federal Housing Administration (FHA)’s mortgage risk maps impact neighborhood trajectories? Have these spatially restrictive credit designations influenced home value, homeownership, and racial segregation? Using the FHA mortgage risk map of Chicago, Illinois, for new loan guarantees as a case study, I measure outcomes between credit zones and compare these risk regions with the Home Owners’ Loan Corporation (HOLC) Residential Security Maps, which represent post hoc measures of mortgage risk and were likely not directly used in loan activities. For areas excluded from FHA loan guarantees, the results suggest a negative impact on home values and homeownership rates and weakly decreased segregation between 1940 and 1980. They also suggest an overcorrection of home values, an undercorrection of homeownership, and an increase in racial segregation in excluded neighborhoods between 1980 and 2010 when these areas may have experienced capital reinvestment. In comparison with the HOLC map, the effects on tracts in Chicago rated worst by the FHA are clearer and suggest a more significant impact during the period of discriminatory mortgage lending.

The Effect of the 2014 Federal Housing Administration Loan Limit Reductions on Homeownership Decisions

ABSTRACTUsing data from the American Community Survey, this article assesses the effects of the 2014 Federal Housing Administration (FHA) loan limit reductions on homeownership decisions. Employing a difference-in-differences identification strategy, we find little evidence that the loan limit reductions caused an overall decline in homeownership rates. However, we do find that overall homeownership rates (as well as African American homeownership rates more specifically) increased in low-price parts of metropolitan statistical areas that experienced a loan limit reduction relative to high-price areas, suggesting that the lack of an overall effect may be because of changing decisions on where to own a home, not whether to own a home. This thesis is further supported by evidence of an increase in commuting times for residents in areas that experienced a limit reduction. Our findings contribute to the debate over how individuals respond and adapt their homeownership decisions to policy changes and credit constraints.

Long-term Outcomes of FHA First-time Homebuyers

The Federal Housing Administration (FHA), which insures mortgages for low- to moderate-income homebuyers, has stated that its goal is to foster sustainable homeownership. This study proposes metrics for evaluating the degree to which the FHA has succeeded in this mission for an important program constituency, first-time homebuyers. The approach uses data from the New York Fed’s Consumer Credit Panel, a data source that makes it possible to observe new mortgage borrowers’ long-term outcomes. The findings presented in sample scorecards show, for example, that in the 2001 and 2002 cohorts, 55 percent achieved “sustainability,” paying off their FHA first-time mortgages and remaining homeowners without the need for a subsequent FHA mortgage. Roughly 12 percent failed, seeing their homeownership experiences end in default. The remainder reached less clear outcomes, with 12 percent paying off their FHA loans but transitioning back to rental homes, 10-12 percent continuing on with their original loans while building more home equity, and 8-10 percent purchasing a trade-up home, relying once more on an FHA loan.

Long-Term Outcomes of FHA First-Time Homebuyers

The Federal Housing Administration (FHA), which insures mortgages for low- to moderate-income homebuyers, has stated that its goal is to foster sustainable homeownership. This study proposes metrics for evaluating the degree to which the FHA has succeeded in this mission for an important program constituency, first-time homebuyers. The approach uses data from the New York Fed?s Consumer Credit Panel, a data source that makes it possible to observe new mortgage borrowers? long-term outcomes. The findings presented in sample scorecards show, for example, that in the 2001 and 2002 cohorts, 55 percent achieved ?sustainability,? paying off their FHA first-time mortgages and remaining homeowners without the need for a subsequent FHA mortgage. Roughly 12 percent failed, seeing their homeownership experiences end in default. The remainder reached less clear outcomes, with 12 percent paying off their FHA loans but transitioning back to rental homes, 10-12 percent continuing on with their original loans while building more home equity, and 8-10 percent purchasing a trade-up home, relying once more on an FHA loan.

Effects of FHA Loan Limit Increases by ESA 2008: Housing Demand and Adverse Selection

This paper examines the impacts of changes in the Federal Housing Administration (FHA) insured loan limit in response to the Economic Stimulus Act (ESA) of 2008. We use difference-in-difference approaches to compare the number of transactions and average loan-to-value ratios for properties located in high-cost areas and low-cost areas, before and after the ESA policy change. We find that the increase in loan limits does results larger demand for FHA loans, both in quantity and quality. However, the behavior is not driven by incentives to buy more housing or by wealth constraints. We find evidence of increased moral hazard in the sense that increased loan limits induced riskier borrowers (allowed “cherry-picking” against FHA), and that much of the increased demand for FHA loans came at the expense of other loans. For instance, newly qualified borrowers, especially via cash-out refinance loans, are more likely to take advantage of increased loan limit policy, and adjust their LTVs. Also, newly qualified loans had higher default rates and higher loss given default rate.

VA Loans Outperform FHA Loans—Why? And What Can We Learn?

Veterans Administration (VA) loans have consistently performed better than Federal Housing Administration (FHA) loans. In this article, the authors take a closer look at both programs to identify why VA loans perform better. They conclude that the residual income test may be a critical differentiating factor and suggest that regulators evaluate whether the test might be a good supplement to the FHA’s current assessment of a borrower’s ability to pay.

Lending Through the Cycle: The Federal Housing Administration’s Evolving Risk in the Primary Market

Utilizing a sample of loan originations, the distribution of the market served by the Federal Housing Administration (FHA) and conventional lenders is modeled through this current cycle. Results indicate that FHA market shares in the early years of the observation period (2003 through 2006) are concentrated in zip codes with higher economic risk characteristics and obtained by high risk borrowers. FHA is forced to accept lower quality loans as competition from more nimble private lenders with lower access hurdles and more rapid processing expanded into markets traditionally served by FHA. Unexpectedly, the analysis also reveals that the distribution of FHA loans fails to exhibit a targeted racial bias toward neighborhoods with African American Concentration.

Competition and Risk Factors in Mortgage Lending: The Federal Housing Administration’s Evolving Role in the Primary Market

This paper presents an analysis of the distribution of home purchase mortgages insured by the Federal Housing Administration (FHA) in the primary mortgage market. Utilizing a sample of loan originations aggregated at the zip code level, the distribution of the market served by FHA and conventional lenders is compared across the State of Florida. Results indicate that FHA market shares are concentrated in zip codes with higher economic risk characteristics and obtained by high risk borrowers over the observation with evidence of market share contraction over the observation period. Unexpectedly, the analysis also reveals that FHA loan distribution fails to exhibit a targeted racial bias toward minority neighborhoods. One potential conclusion is that FHA was forced to accept lower quality loans as competition from more nimble private lenders with lower access hurdles and more rapid processing expanded into markets traditionally served by FHA.

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

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.

FHA vs. Subprime Mortgage Originations: Is FHA the Answer to Subprime Lending?

We analyze originations of mortgages guaranteed by the Federal Housing Administration (FHA) and of subprime mortgages—loans that dominate the non-prime mortgage market for riskier borrowers. Using home purchase and refinance loans data for 2005, we estimate that a sizeable number of borrowers who got subprime loans would have qualified for FHA loans, implying a potential net flow of borrowers from subprime to FHA, especially for refinance loans at a rate of about 30%. Also, consistent with the FHA’s modernization proposal to increase its loan limits, we find that increasing the limits on FHA loans could help to attract borrowers, mostly of home purchase loans, who are likely to be constrained by the lower-priced house limits. Our findings are generally in line with the recent increased flow of mortgages to FHA, and suggest that FHA loans could be the answer to the current subprime lending crisis.

Outlook: The subprime lending crisis: Focus on the problem: Subprime borrowers in trouble

Public policy should be directed at serving the large number of borrowers who have recently taken out subprime loans and who are at serious risk of losing their homes when their mortgages reset. Practicing forbearance and providing counseling for defaulting homeowners, as well as allowing them to refinance into a Federal Housing Administration loan, can be particularly helpful. Broad changes in housing programs and in the structure of the mortgage market should be considered on their merits as good or bad public policy for the long term, not simply as solutions to the subprime problem.

Interest Rates and the Foreclosure Process: An Agency Problem in FHA Mortgage Insurance

Interest Rates and the Foreclosure Process: an Agency Problem in FHA Mortgage Insurance Unlike private mortgage insurance that establishes a coinsurance relationship with the lender, Federal Housing Administration (FHA) insurance provides full coverage of all losses including foregone interest on defaulted loans. The foregone interest component of the indemnity is at the original mortgage contract rate. This arrangment offers lenders an opportunity to exploit changes in interest rates. Specifically, lenders have an incentive to expedite (slow) the foreclosure process when the market rate is above (below) the contract rate. If the market rate is above the contract rate, the lender will expedite the process (within the constraints of the legal requirements) and reinvest the indemnity at a higher rate. Conversely, if the market rate falls below the contract rate, the lender is better off by slowing the process (again, within the constraints of legal parameters) because the loan balance earns the higher contract rate. Evidence presented below shows that this behavior can be costly to the FHA. A 10 percent decrease in interest rates (say from 10 percent to 9 percent) costs the FHA an estimated $1,151 per claim. Numerous examples of agency problems exist in financial contracting (see Jensen and Meckling [1976]). In real estate contracts in particular, examples of agency problems include borrower maintenance of property facing foreclosure, covenants included in mortgages (Smith, 1982), and terms of shopping center leases (Benjamin, Boyle, and Sirmans, 1990). Similarly, agency problems associated with insurance contracts have been noted (see Mayers and Smith, 1981). Mulherin and Muller (1988) pose an incentive conflict whereby lenders have no motivation to expend costly effort to make repairs on foreclosed properties. Mulherin and Muller (1987) note the possibility that lenders may encourage default (rather than continued performance through a workout) on a fully insured mortgage that is in danger of default. As is true of the present study, the incentive conflict results from a divergence of the market and contract rate. They conclude that a rise in the market rate will lead to more defaults as lenders seek to improve the quality of their loan portfolios. They conclude a rise in rates is, therefore, costly to the FHA. In the current study the conclusion is different since the focus is on the post-default incentive conflict. That is, given a default and a rise in rates, the lender has an incentive to foreclose as quickly as possible. A quick foreclosure minimizes the total claim including carrying costs such as property taxes, hazard insurance, maintenance expenses, and so forth. A fall in rates proves costly in our model. This article proceeds as follows. The next section discusses the effects of the incentive conflict on the speed of the foreclosure process and the per claim loss for FHA loans. Next, data and methodology are presented. Empirical results are then followed by conclusions. Lender's Incentives: FHA Insurance Consider a lender holding a defaulted mortgage loan. After the foreclosure process the lender will submit a claim to the FHA for losses. (In a few cases the lender can assign the loan to the FHA which will, in turn, attempt a workout with the borrower.) Those losses will consist of two parts: foregone interest on the loan balance and property carrying costs such as taxes, insurance, and maintenance expenses. Initially, the lender will not have made expenditures for carrying costs so if the contract rate is above the market rate, there is an incentive to delay the foreclosure process. As carrying costs occur, the lender must meet these out of pocket and get reimbursed at a later date without interest, reducing this incentive to delay. Appendix A demonstrates that the strength of this incentive to delay is negatively related to the market rate of interest. …

Tying FHA loan limits to median house prices: A policy to channel FHA credit to higher income households

Legislation was introduced in the House of Representatives in 1989 to raise the Federal Housing Administration (FHA) maximum loan ceiling in “high-cost” areas from $101,205 to 95 percent of the area median house price. This change would significantly alter the spatial distribution of FHA loans. Using 1989 median house prices computed by the National Association of Realtors (NAR), the limit’s increase to 95 percent of area median house price would raise the FHA ceiling to $232,000 in the San Francisco Bay area, to $226,000 in Orange County, California, to $173,000 in the New York area, and to $170,000 in Boston, Massachusetts. The FHA limit in the highest cost areas would rise from 1 1/2 times the limit in the lowest cost areas to almost 3 1/2 times. While other measures of median price might be used, they would probably lead to the same result. The issue is whether median house prices are a reasonable standard by which to set FHA loan limits.