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Monday, September 22, 2014

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The Quality of FHA Lending in Pennsylvania, New Jersey, and Delaware

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Background

Print Version of Complete Report

FHA Lending Patterns Nationally and in the Third District States PDF (27 pages, 858 KB)

The Federal Housing Administration (FHA), an agency within the Department of Housing and Urban Development (HUD), insures mortgage loans made by private lenders.1 All FHA-insured borrowers pay for mortgage insurance as one of the terms of their mortgage loan, and this insurance protects the lender against losses if the borrower defaults.2 In addition to providing a mortgage guarantee, the FHA single-family loan program has features such as a low down payment and a low minimum credit score that benefit borrowers who may not be able to obtain financing in the conventional market. Because of the FHA’s guarantee, lenders are willing to extend credit to borrowers who might otherwise be excluded from the mortgage market. In recent decades, the FHA single-family home loan program has disproportionately served first-time homebuyers as well as low- and moderate-income (LMI) and minority households.3

The market share of the FHA portfolio has waxed, waned, and waxed again in recent years, as discussed in an earlier report.4 The recent growth in the FHA portfolio means that it now serves a much broader segment of the housing market than its traditional base. Over the past decade, the housing market as a whole as well as the FHA portfolio’s performance has been influenced by several major factors, including trends in interest rates, unemployment rates, house prices, and the rise and fall of the subprime market.

As the FHA portfolio has grown in relative market share and size since the beginning of the housing crisis in 2007,5 it has experienced a concomitant increase in its delinquency rates and a corresponding decrease in its capital reserves, raising concerns about potential costs to taxpayers.6 While an in-depth examination of the financial condition of the entire FHA program is beyond the scope of this investigation, this report provides information on the quality and performance of recent borrower cohorts in 2006, 2007, 2008, and 2009, both nationally and in the Third District states of Pennsylvania, New Jersey, and Delaware. The credit score at the time of loan origination is used as a measure of borrower quality, while loan status at the one-year point is used as an indicator of loan performance.

Data Sources

The data sources for this investigation include the Home Mortgage Disclosure Act (HMDA) database and a large national mortgage database of servicer data compiled by Lender Processing Services (LPS) Applied Analytics, Inc. The HMDA database is used to present an overview of FHA lending patterns in the Third District states in the next section. While the HMDA database does not contain information on all mortgage originations, it covers a large majority, and it is particularly well-suited for providing time series data on lending volume for the FHA program and for the FHA program’s market share.7

The LPS database covers approximately 60 percent of all prime originations and 19 percent of all subprime originations. Also, the number of FHA loans in the LPS database is approximately 60 to 70 percent of the number of FHA loans in the HMDA database.8 While LPS’s coverage of the FHA portfolio is lower than HMDA’s, the LPS database contains additional variables on credit score and performance that are missing in the HMDA data. This report uses those additional variables to examine borrower credit score trends and delinquency patterns in the 2006, 2007, 2008, and 2009 cohorts of the FHA portfolio.

  • 1 The FHA administers a variety of mortgage programs that provide individuals with purchase or refinance mortgages as well as other programs such as reverse mortgages for older households. The two largest of its four mortgage insurance programs are the Mutual Mortgage Insurance/Cooperative Management Housing Insurance (MMI) program and the General Insurance/Special Risk Insurance (GI/SRI) program. The MMI program provides insurance for home mortgages and for home equity conversion mortgages (HECMs), and the GI/SRI program provides insurance for multifamily rental construction and funds for hospitals and assisted living facilities throughout the United States.
  • 2 This insurance is paid for in the form of an upfront fee as well as an annual premium. Lenders originating FHA loans are required to carry out loss mitigation on their FHA loan portfolio.
  • 3 In this report, the FHA single-family home loan program is called simply the FHA program. See the FHA’s website for more information on the history of the program and its accomplishments by decade: http://www.hud.gov/offices/hsg/fhahistory.cfm. External Link
  • 4 See Federal Reserve Bank of Philadelphia, 2011.
  • 5 See Federal Reserve Bank of Philadelphia, 2011, for a more complete discussion of overall FHA trends in the nation.
  • 6 See Department of Housing and Urban Development, November 17, 2010, or the article by Timiraos.
  • 7 For a complete discussion of HMDA reporting requirements, see the publication of the Federal Financial Institutions Examination Council, “Who Reports HMDA Data?” (Washington, D.C., 2010), available at http://www.ffiec.gov/hmda/reporter.htm. External Link
  • 8 For the nation as a whole, FHA coverage in LPS is at least 60 percent of HMDA. Coverage varies by geography and is higher in the Third District states. While it varies for different years, the coverage for the Third District states is at least 75 percent. (The lowest share of coverage is the 75 percent figure for Pennsylvania in 2006; coverage is higher in all other geographies and time periods for the Third District states.) Despite considerable overlap between LPS and HMDA, the LPS dataset contains some FHA loans that are not in the HMDA database. In turn, the set of loans used in analyzing the LPS data is not simply a subset of the set of loans used in the HMDA analysis.
  • Last updated: June 3, 2011