FHA AT 80: PREPARING FOR THE FUTURE

U.S. Department of Housing and Urban Development | Office of Policy Development and Research FHA AT 80: PREPARING FOR THE FUTURE

Edward L. Golding

Edward J. Szymanoski

Pamela P. Lee

August 2014

This issue brief lays out FHA’s mission in the single-family mortgage market and presents its historical role in meeting immediate and emerging challenges over its history. The paper draws from “The FHA Single-Family Insurance Program: Performing a Needed Role in the Housing Finance Market,” a 2012 research paper by Edward Szymanoski, William Reeder, Padmasini Raman, and John Comeau.

FHA at 80: Preparing for the Future

FHA at 80: Preparing for the Future

Executive Summary

In 1934, when FHA was established, the standard mortgage product was a balloon instrument, with a repayment schedule The mission of the Federal Housing Administration (FHA), which spread across 3 to 5 years and ending with a balloon payment, turned 80 in June 2014, is as important today as it was when which typically forced borrowers to take out another mortgage.

the agency was founded in 1934. This article looks briefly at Growing unemployment rates and a shortage of lenders for even FHA’s past to highlight the integral role it has played in Ameri-creditworthy borrowers threatened millions of homeowners with can homeownership and rental housing. In looking at the data, foreclosure. With a goal of reducing the impact of the crisis and three themes emerge: (1) FHA has been instrumental in helping preventing, or at least dampening, future crises, FHA responded American families purchase their first homes; (2) FHA loans by creating a new housing finance system to incentivize lend -

have been available in periods of market disruption when other ing and ensure the vitality of the housing market. FHA created sources were not; and (3) FHA mortgages have been the product national lending standards and revolutionized the mortgage of choice—and in some cases, necessity—for many low- and market by providing insurance against default to lenders who moderate-income and minority families. Similar themes extend (1) offered fixed-rate, long-term, fully amortizing mortgages, to FHA’s multifamily business and related programs: FHA’s and (2) ensured that mortgages and borrowers met national Office of Multifamily Housing Programs (OMHP), for example, underwriting and construction standards. Standardization and focuses on properties with affordable rents; at times when other minimum standards helped identify creditworthy borrowers, lenders have reduced credit access, OMPH has increased its provided borrowers with a measure of certainty about their volume of lending. As the amount of time since the most recent long-term financial picture, and ensured that properties were crisis grows longer, FHA is moving into the future, focusing on habitable and marketable. Along the way, the Government rebuilding and strategic planning so it can continue delivering National Mortgage Association (now known as Ginnie Mae) on its mission while protecting taxpayers. During the Great was created to provide liquidity for FHA mortgages.

Recession (from December 2007 through June 2009), FHA’s financial health was tested, but recent data show significant Although FHA has been an important stabilizing force in the improvement on this front. Work to prevent and reduce the housing market and has been instrumental in extending credit ultimate costs of foreclosures continues, and FHA origination to underserved markets, it also has a history of limiting lending volumes are returning to long-term, precrisis levels. The future in minority communities. It is important to not only remember is certainly brighter, albeit still somewhat uncertain as Congress this history, but also to recognize that, today, FHA has evolved weighs housing finance reform and the Federal Housing Finance past these discriminatory practices and is now providing the Agency’s new director, Melvin Watt, considers the short-term most assistance to groups to which it would not have lent in direction for the conventional market. Despite this uncertainty, the past.

FHA’s core mission remains the same, although it will need to be refined to accommodate demographic trends that indicate Countercyclical Role

growing numbers of first-time homebuyers with limited means and a deficit of affordable multifamily properties. In anticipation From its origins countering the impact of the Great Depression of future economic volatility, FHA is strengthening its financial on the housing market, FHA has grown to become a major vitality to ensure that it can continue playing a vital role in stabilizing force in the American economy. The agency’s coun-American homeownership and rental housing.

tercyclical role is evidenced by trends in the agency’s share of mortgage originations (see exhibit 1). On average, during the A Brief History of FHA

past 80 years, the share of total mortgages originated by FHA has been about 13 percent, but its market share varies with FHA has played an integral role in the American housing system fluctuations in the economy. During times of market disruption, and homeownership during the past eight decades. Created in for instance, the share of FHA-originated mortgages increases.

the midst of the Great Depression to address a housing crisis Since World War II, FHA’s market share increased by more that affected millions, FHA transformed the American mortgage than 5 percentage points in a year’s time during four instances system and enabled millions of Americans to purchase their (1948, 1958, 1970, and 2008). According to the National first homes.

Issue Brief

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FHA at 80: Preparing for the Future

Exhibit 1. FHA’s Market Share Varies With Fluctuations in the Economy FHA Share of Mortgage Originations (percent)

30

25

20

15

10

5

0

1935 1937 1939 1941 1943 1945 1947 19491951 1953 1955 1957 19591961 1963 19651967 1969 197119731975 1977 1979 1981 1983 1985 19871989 1991 1993 19951997 19992001 20032005 200720092011 2013

FHA market share

Average

FHA = Federal Housing Administration.

Sources: U.S. Department of Housing and Urban Development; Freddie Mac; Inside Mortgage Finance Bureau of Economic Research, these four periods have been savings from which to draw, FHA helps them secure first-time times of economic recession, when non-FHA mortgages were homeownership through the agency’s relatively smaller down-difficult to obtain.

payment requirement, which is 3.5 percent.

FHA more recently demonstrated its vital countercyclical role A 2012 study by the Center for Responsible Lending (CRL) during the Great Recession. Although other sources of liquidity underscores the importance of low-downpayment mortgages in retreated from the market, FHA continued to originate loans; promoting homeownership (Bocian, 2012). Using 2010 Ameri-in addition, Ginnie Mae, created in 1968, continued to ensure can Community Survey data, CRL estimated that the average adequate liquidity for FHA mortgages. Research indicates household would require 20 years to save enough money for a that, in the absence of FHA-insured mortgages, home sales 10-percent downpayment. The barriers to homeownership are prices would have declined another 25 percent, which would greatest for minority households: African-American households have contributed to an additional $4 trillion loss of household would require 31 years and Hispanic households would require wealth and exacerbated the already severe impacts of the 26 years to save enough money for a 10-percent downpayment.

economic meltdown (Griffith, 2014).

In contrast, a low-downpayment FHA mortgage reduces by two-thirds the time required to secure a mortgage, enabling more First-Time Homebuyers

households to own their first home earlier. Earlier homeownership has been shown to be particularly beneficial for school-FHA has insured about 13 percent of all mortgage originations aged children (Green, Painter, and White, 2012). In promoting during the past 80 years, but it has funded more than 50 percent homeownership, FHA provides tangible benefits to families and of all first-time homebuyer mortgages during this same time (see communities.

exhibit 2). Because first-time homebuyers tend to have smaller Issue Brief

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FHA at 80: Preparing for the Future

Exhibit 2. First-Time Homebuyers Rely More on FHA an FHA mortgage. Over the past two decades, the ratio of Loans Than on Conventional Loans

African-American and Hispanic households obtaining an FHA FHA Share of First-Time Buyer Loans for Selected Years (percent) mortgage has averaged more than one-third. Exhibit 3 shows that FHA has provided a stable source of financing for commun -

75

67

68

67

ities that have not been served well by the conventional market.

57

60

53

55

Multifamily and Rental

Programs

23

Slightly more than one-third of American families (35 percent) rent their homes. As the cost burden of rental housing has grown, 1995

1997

1999

2001

2003

2007

2009

2009

2010

FHA has increased its efforts to finance market-rate multifamily Note: Conventional market data limited to loans purchased or guaranteed by rental units. For instance, the volume of FHA multifamily mort-GSEs (government-sponsored enterprises such as Fannie Mae and Freddie Mac).

gages increased from approximately $3 billion per year before Sources: U.S. Department of Housing and Urban Development; Federal Housing Finance Agency (GSE public-use database) the Great Recession to more than $13 billion as conventional financing grew scarce. Providing low-cost financing for apart-ments supports affordable rents. Furthermore, properties with Underserved Communities

FHA-insured mortgages tend to be more affordable, especially for low- and moderate-income households. In addition to in -

Since 2008 through 2009, more than one-half of mortgage-suring traditional multifamily rental properties, FHA insures seeking African-American and Hispanic households have obtained residential care mortgages that support assisted-living facilities, Exhibit 3. FHA Has Provided a Stable Source of Financing for Communities That Have Not Been Well Served by the Conventional Market

FHA as Share of HMDA-Reported Home Purchase Mortgage Originations by Race/Ethnicity of Borrower (percent) 60

50

40

30

20

10

FHA originations as percent of total market originations for group 0

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Year of loan origination

White

Black or African-American

Hispanic or Latino

FHA = Federal Housing Administration. HMDA = Home Mortgage Disclosure Act.

Note: One- to four-unit (single-family) home purchase loan originations—first-lien, owner- and nonowner-occupant borrowers, including manufactured housing.

Source: HMDA

Issue Brief

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FHA at 80: Preparing for the Future

nursing homes, intermediate-care facilities, and board-and-care Other FHA Programs

homes. Like the multifamily rental segment, this segment also increased after the Great Recession (see exhibit 4). With the FHA also plays an important role in markets that are tradition-increased share of Americans renting, FHA’s support for rental ally not served well by the conventional mortgage market. For housing is as important as its support for homeownership.

example, the Home Equity Conversion Mortgage (HECM, or FHA reverse mortgage) program enables senior citizens to tap into the home equity they have accumulated while enabling Exhibit 4. FHA Endorsements of Multifamily and Residential Care Mortgages Have Exhibited a Countercyclical them to stay in their homes. FHA facilitates these mortgages by Rise Since 2008

providing government-backed insurance that protects lenders and investors from losses, if any, when loans become due. In FHA Multifamily and Residential Care Mortgage Insurance Endorsements

the recent past, the volume of HECM origination has climbed for a variety of reasons. In the run-up to the crisis, between 20

2004 and 2009, rising home sales prices and falling interest rates contributed to a surge in HECM popularity (see exhibit 5); 15

during this same period, baby boomers also began to reach retirement age. Following the crisis, even as the senior population 10

has continued to grow, retirement assets have been adversely impacted by the Great Recession. With recent changes to the Dollars (billions)

5

HECM program and the improving economy, volumes are returning to prerecession trend levels.

0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

FHA also finances hospitals, manufactured housing, and home Multifamily rental

Assisted living

improvements. Although these programs serve a smaller role FHA = Federal Housing Administration.

in the housing market than FHA’s single-family business line, Note: FHA multifamily rental and residential care mortgage dollar volumes by year of initial endorsement.

overall, FHA has ensured continuity of mortgage credit for Source: U.S. Department of Housing and Urban Development Exhibit 5. FHA Plays an Important Role in the Reverse Mortgage Market FHA HECM Cases Endorsed for Insurance

140

120

100

80

60

40

Number of cases (thousands)

20

0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004 2005

2006

2007

2008

2009

2010

2011

2012

2013

Fiscal year

FHA = Federal Housing Administration. HECM = Home Equity Conversion Mortgage.

Note: Fiscal years (FYs) begin October 1 and end September 30; for example, FY 2013 is October 1, 2012, to September 30, 2013.

Source: U.S. Department of Housing and Urban Development Issue Brief

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FHA at 80: Preparing for the Future

families, communities, and segments of the market that other-African-Americans, Hispanics, and other traditionally lower wise would have had difficulty obtaining financing. FHA plays income and lower wealth minorities, who will account for a stabilizing role and steps in when other conventional lenders three-fourths of household growth during the coming decade.

exit the market during periods of market stress.

FHA is well positioned to serve the next generation of younger, relatively lower income and lower wealth households to either Present and Future

obtain affordable market-rate rental housing or earlier access to homeownership. These new homeowners will lean heavily Having served its mission once again, following the Great Reces -

on FHA, because high levels of indebtedness and relatively low sion, FHA’s resources were strained by its rapid growth in market incomes will impede their ability to save large downpayments.

share (as it stepped in to fill the gap left by other retreating lend -

As it has been in the past, FHA will remain a major source of ers) and by the drop in home sales prices. In 2012, the Mutual mortgage credit for underserved markets, first-time homebuy-Mortgage Insurance Fund (MMIF), which funds insurance on ers, and minority families, and it will provide financing in FHA’s core single-family business line, declined to negative $16

future economic downturns.

billion, as measured by its economic net worth (capital reserves plus present value of future cash flows on existing loans). Due to the recession, FHA’s cash reserves were down but never de -

References

pleted; however, projected cash flows for the next 30 years were Bocian, Debbie Gruenstein. 2012. “The Negative Impact of a sufficiently negative to produce a negative net worth. As of the Government-Mandated 10 Percent Down Payment for Quali-latest assessment, in 2013, the MMIF was at a negative $1.3 bil -

fied Residential Mortgages (QRMs).” Durham, NC: Center lion and remained below its required 2-percent capital reserve

for Responsible Lending. http://www.responsiblelending.org/

ratio. But the tide is shifting, and in the right direction: the MMIF

mortgage-lending/policy-legislation/regulators/QRM-10percent-

gained $15 billion in economic value between 2012 and 2013,

issue-brief-Aug16-1-2.pdf (accessed July 15, 2014).

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Green, Richard K., Gary Painter, and Michelle J. White. 2012.

“Measuring the Benefits of Homeowning: Effects on Children Even as the economy has improved, FHA has made significant Redux.” Research Institute for Housing America Research Paper changes in risk management to mitigate existing and reduce

No. 12-01. http://www.ssrn.com/abstract=2171327 (accessed future losses, including increases to its mortgage insurance July 15, 2014).

premiums, which will position FHA to continue fulfilling its mission into the future. Emerging trends, however, will present Griffith, John. 2014. “The Federal Housing Administration Saved challenges, and regulators will need to consider how the agency the Housing Market.” Washington DC: Center for American can fulfill its mission and protect taxpayers while evolving to

Progress. http://www.americanprogress.org/issues/housing/

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University indicates that economic conditions have been conspir -

saved-the-housing-market/ (accessed July 15, 2014).

ing to reduce household formation rates among young adults, who are likely to have low incomes, live with their parents Joint Center for Housing Studies. 2014. “The State of the out of necessity, and rent (driving up demand and the prices Nation’s Housing 2014. Cambridge, MA: Harvard University.

of rental homes) (Joint Center for Housing Studies, 2014). In

http://www.jchs.harvard.edu/research/state_nations_housing

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Issue Brief

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