A Second Look at FHA’s Evolving Market Shares by Race and Ethnicity
Since the 1930s, the Federal Housing Administration (FHA) has been an important component of the federal government’s involvement in the national housing finance system. FHA adds liquidity to the mortgage market by insuring lenders against borrower default, which makes private lenders more willing to offer mortgages at favorable interest rates.
FHA home mortgage programs have historically played an important countercyclical role in the market. In regions experiencing a recession, prime conventional lenders and private mortgage insurers typically tighten their underwriting standards, limiting lending in those regions to only the most creditworthy applicants and reducing their exposure to risk. FHA, on the other hand, maintains a presence in all markets, providing stability and liquidity in regions experiencing recession. Conversely, during good economic times the market share for FHA home purchase mortgages often declines because more homebuyers qualify for conventional mortgages with less costly private mortgage insurance. Since 2006, nearly all U.S. regions have experienced falling home prices, rising defaults, and foreclosures, and conventional mortgage liquidity has been severely curtailed. Nationwide tightening of conventional credit explains the recent dramatic increase in overall market share for FHA home purchase mortgages. (See figure 1.)
HUD examined trends in the mortgage market from 2003 to 2009 in “A Look at the FHA’s Evolving Market Shares by Race and Ethnicity,” a 2011 article in U.S. Housing Market Conditions (USMC). The authors showed that since the start of the housing crisis in 2007, use of FHA-insured mortgages to finance home purchases has risen dramatically. 1 The article also found that over the same period an even more dramatic rise in the use of FHA financing had occurred among homebuyers who identified as racial or ethnic minorities. The increased reliance of homebuyers, especially minority homebuyers, on FHA financing raises questions about how well the prime conventional market will serve future homebuyers given the changes in the mortgage lending industry since the start of the housing crisis in 2007 as well as anticipated institutional changes outlined in the Obama administration’s white paper on housing finance reform. That is, will pending reforms designed to prevent a future housing crisis deal with the heavy reliance of some groups of borrowers on FHA-insured lending for home purchase financing while reducing the federal government’s overall footprint in the housing finance market?
The 2011 HUD findings regarding FHA market shares by race and ethnicity use data reported by most mortgage lending institutions as required by the 1975 Home Mortgage Disclosure Act (HMDA). HDMA data are compiled and published annually by the Board of Governors of the Federal Reserve System in conjunction with the Federal Financial Institutions Examination Council. Although data on total FHA and conventional lending volumes are available from other sources, only the HMDA data provide publicly available information about borrowers’ race and ethnicity. At the time the USMC article was published, the most recent HMDA data available were for mortgages originated in 2009. The 2010 HMDA data are now available, 2 and this article extends the original analysis to include the additional year of data.
Figure 2 uses HMDA data from 2003 through 2010 to show the percentages of total homebuyers and categories of homebuyers sorted by racial and ethnic group who used FHA financing to buy their homes. For example, HMDA data show that in 2010, about 36 percent of all homebuyers used FHA financing; 33 percent of white borrowers used FHA compared with nearly 60 percent of African American and Hispanic or Latino homebuyers. The 2010 shares show slight declines compared with 2009 FHA shares for all borrowers and white borrowers, and about the same shares for African-American and Latino borrowers, who continue to rely heavily on FHA for home purchase financing. Exhibit 1 provides the actual number of mortgage originations reported in HMDA organized by racial and ethnic groups and by type of financing.
Clearly, the findings of the 2011 USHMC article remain valid. Specifically, since African Americans and Hispanics continue to be more affected by the post-housing-crisis tightening of conventional underwriting than whites, FHA’s less restrictive underwriting requirements have resulted in the continued high FHA market share in 2010 among homebuyers in these racial/ethnic groups. Just before the crisis, the subprime and nontraditional mortgage markets had captured high shares of black and Hispanic homebuyers, as evidenced by a marked drop in FHA minority shares between 2002 and 2007. Because financial regulation and institutional reforms make a return of subprime and nontraditional lending in the current market less likely, the ability of the prime conventional market to serve homebuyers identifying as racial and ethnic minorities is likely to be an important issue for policymakers.