A Study of Market Sector Overlap and Mortgage Lending
This recently completed study investigates the amount of overlap between two mortgage market sectors, the Federal Housing Administration (FHA) and the Government-Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac. In this case, overlap refers to loans that could have been handled in either market.
Previously collected loan-level data provided the basis for estimating the overlap within 11 metropolitan statistical areas in 1998-2000. Compared to GSE-purchased loans, FHA-insured loans had lower borrower credit scores and higher loan-to-value ratios, and were more strongly targeted to lower-income and minority borrowers. However, the study found that although the two mortgage market sectors mostly serve distinct segments of the population, about 10 percent of FHA loans had risk characteristics similar to loans purchased by the GSEs.
The study also examined overlap between other pairs of mortgage market sectors. It found that 15 percent of FHA loans had risk characteristics similar to loans insured by private mortgage insurance companies, and only 13 percent of FHA loans had risk characteristics similar to subprime loans, a smaller than expected degree of overlap that is accounted for by the typically smaller downpayments on FHA loans compared to subprime loans.