FHA Lending Research Articles

“Don't Know What You Got till It’s Gone”: The Community Reinvestment Act in a Changing Financial Landscape

This study provides new evidence on the impact of the Community Reinvestment Act (CRA) on mortgage lending by taking advantage of an exogenous policy shock in 2014, which caused significant changes in neighborhoods’ CRA eligibility in the Philadelphia market. The loss of CRA coverage leads to an over 10% decrease in purchase originations by CRA-regulated lenders. While nondepository institutions replace approximately half, but not all, of the decreased lending, their increased market share is accompanied by a greater involvement in riskier and more costly FHA lending. This study demonstrates how different lenders respond to the incentive of CRA credit.

The Impact of Federal Housing Policy on Housing Demand and Homeownership: Evidence from a Quasi-Experiment

Federal housing policy promotes homeownership by subsidizing mortgage debt for many households with few assets and low credit scores. In this paper, we exploit the Federal Housing Administration’s (FHA’s) surprise 50 basis point cut to its annual mortgage insurance premium in January 2015 to study the impact of federal housing policy and interest rates on housing demand for a population of households likely to be influenced by changes to policy. The premium cut, which reduced monthly payments the same amount as a three-quarter percentage point drop in the mortgage rate, increased the purchasing power of the typical FHA borrower by 6 percent. Our analysis suggests FHA borrowers increased the value of the housing they purchased by 2.5 percentage points relative to a control group of borrowers in areas with minimal FHA presence. The rise in spending reflected an increase in constant-quality home prices, with no significant change in the quality of housing purchased by FHA buyers. We also estimate that the premium cut induced approximately 17,000 households to become first-time homebuyers in the initial year after the cut, an increase that fell far short of the FHA’s projection. Because the rise in constant-quality house prices affected both FHA and other buyers in areas with substantial FHA lending, non-FHA first-time buyers as a group incurred a cost of $180,000 for each of the 17,000 new first-time FHA buyers.

The downs and ups of FHA lending: The government mortgage roller coaster ride

Throughout the last decade, mortgage markets experienced both a considerable decline and a considerable increase in the share served by the FHA. Concerns have grown about the solvency of the program and about the access to credit of the borrowers served by the FHA market. These concerns are due, at least in part, to the evolving distribution of loans in the FHA portfolio and uncertainty about future patterns of lending. This paper attempts to explain FHA lending patterns over the past decade, particularly the dramatic downs and ups of FHA lending. We pay particular attention to the drivers of these changes, and the implications of these changes for FHA lending, mortgage markets, and associated public policy initiatives.

The Downs and Ups of FHA Lending: The Government Mortgage Roller Coaster Ride

Throughout the last decade, mortgage markets experienced both a considerable decline and a considerable increase in the share of the market served by the FHA. Concerns have grown about the solvency of the program and about the access to credit of the borrowers served by the FHA market. These concerns are due, at least in part, to the evolving distribution of loans in the FHA portfolio and uncertainty about future patterns of lending. This paper attempts to explain FHA lending patterns over the past decade, particularly the dramatic downs and ups of FHA lending. We pay particular attention to the drivers of these changes, and the implications of these changes for FHA lending, mortgage markets, and associated public policy initiatives.

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 United States. 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, the FHA played one of its historic roles—the mortgage lender of last resort—and its lending surged, reaching approximately 40% of home purchase lending by the end of 2008, a level not seen since World War II. This article examines the differences in FHA activity across and, especially, within U.S. metropolitan areas in late 2008, a peak period of the crisis. The focus is on loans with moderate loan-to-value ratios, among which FHA status varies the most. Factors that affect the likelihood of such loans being FHA-insured include credit score, regional housing price trends, neighborhood demographics (including racial composition), and a variety of other factors. Controlling for many other loan-level and zip code characteristics, the odds of a loan being FHA-insured increase substantially when going from a predominantly white to an otherwise similar predominantly black zip code.

CRA Lending in a Changing Context: Evidence of Interaction with FHA and Subprime Originations

This article uses a unique demonstration program to examine the interaction of CRA-related lending with subprime and FHA lending activity. Specifically, the empirical analysis identifies the extent to which the origination of a CRA mortgage substitutes for FHA and subprime originations during the period 1998–2006. The results suggest that in the years prior to the expansion of the subprime market (1998–2001), the origination of CRA loans carried a small substitution effect with respect to FHA originations, with little to no impact on subprime originations. Conversely, during the years of the subprime industry’s growth (2002–2006), CRA originations substituted at a much higher rate for high-cost originations. These findings are suggestive about the dynamic role of community reinvestment lending within the changing context of the broader mortgage market. To the extent that CRA originations carry lower foreclosure risk than many subprime products, they also carry implications for the extent of neighborhood externalities in the wake of the subprime foreclosure crisis.

GSE Activity, FHA Feedback, and Implications for the Efficacy of the Affordable Housing Goals

There is a seeming paradox regarding the “affordable housing goals”: GSE activities in targeted communities have increased under the goals but there has been little measurable improvement in housing market conditions in these communities. This paper seeks to reconcile this paradox by focusing on linkage between GSE purchases and FHA activities. We present a simple theoretical framework suggesting that GSE activities can have a feedback effect on FHA. More aggressive GSE pursuit of targeted borrowers under the affordable housing goals induces potential FHA borrowers with best credit quality to use the conventional market. Changes to the housing market will depend on the FHA response to the loss of its best credits, with many different possible outcomes for credit supply and homeownership, including scenarios in which they remain effectively unchanged. While market-level benefits might not be forthcoming, the shift from FHA to less costly conventional loans is clearly beneficial for affected borrowers. Two-stage least squares estimates of the relationship between GSE and FHA lending after the affordable housing goals were made more binding are found to be consistent with the theoretical predictions.

Determinants of the ARM Share of FHA and Conventional Lending

Loan-choice research has generally examined the determinants of fixed-rate mortgage (FRM) versus ARM lending in the single-family conventional market. Little attention has been paid to the significant differences in ARM lending between the GSE conforming and jumbo markets, as well as differences in the FHA market. For example, the ARM share of jumbo originations is generally two to three times that of the conforming market. This article extends past analysis by examining the determinants of ARM market share in the conventional conforming, jumbo, and FHA markets. Mortgage-pricing variables and the slope of the Treasury yield curve, a proxy for expectations of the time path of ARM indexes, were generally found to be significant. Further, the geographic shift in FHA lending toward the California market since 1992 was found to explain a significant part of the increase in the ARM share of FHA originations during the mid-1990s.

Financing Home Ownership

This paper traces federal housing policies related to single-family home ownership from their creation in the 1930s to the present. In particular, the article focuses on policies of the Federal Housing Administration and the Federal Home Loan Bank Board and other federal regulators of financial institutions. The theme of the article is that the original policies of FHA and the financial institution regulators either directly prohibited (FHA) lending to minorities or other residents in minority or racially mixed neighbor hoods or discouraged lending in such neighborhoods. This helped lead to a situation where these neighborhoods were starved for credit. In response to civil rights and neigh borhood movements, FHA radically reversed its policies, underwriting almost any loan in older, minority, and integrated neighborhoods, while the regulatory agencies generally made no effort to reverse existing lending practices. The result was that these neighbor hoods became inundated with FHA lending, which was often subject to fraud and abuses leading to high concentrations of foreclosures and abandonments. Thus, the federal attempts to cure the problems of inner-city housing finance actually made the situation much worse.