By Any Measure FHA's Role is Shrinking
The Federal Housing Administration (FHA) saw its share of the mortgage insurance market soar to 72 percent of all insured mortgages issued in 2008 and to 25% of the total origination market in 2009 as other lenders pulled back and FHA moved into one of the two roles it was designed to fill, as a counterforce providing access to credit when the private sector pulls back, typically because of economic stress. Since then that share has steadily declined and FHA is back down to around 15-17 percent.
In a recent entry in the National Association of Realtor's® Economist Commentaries, Ken Fears, NAR's Director of Regional Economics and Housing Finance, says that with the recent changes in FHA's insurance premiums it is worth reviewing the agency's impact on the market. First, he says, unit volume as above is only one way to measure FHA's market share. It can be viewed as a share of:
- Total home purchases
- The mortgage market: purchase money, refinances, or the combined total, or
- The market for mortgage insurance
Each of these measures can, in addition, be calculated by either dollar volume or unit count. He says this is an important distinction as FHA's other role, to act as a source of funding for credit-worthy borrowers who face limited access from private sources, like first time, low income or minority buyers means its natural market is lower priced homes. This could of course lower its market share using a dollar volume measure, while it would increase a market share measure calculated with units.
Fears says, that no matter which measure is used, it is clear that the role of FHA is contracting as private money comes back into the market. For example, using a measure based on total units of home sales, FHA's market share fell by half from 2010 to 2014. First there was an increase in all-cash sales as investors came into the market and owner occupants face tightened underwriting. Then, starting in 2011 private mortgage insurance expanded into higher loan-to-value ranges. Together these reduced FHA's market share.
When the focus is shifted to share of mortgage originations the cash purchase effect is eliminated but FHA's impact still dwindles. Its share of purchase mortgages and all mortgages fell sharply from 2009 to Q3 2014 and this is true whether looking at dollar volume or unit share. Fears points to the sharp rise in the two "total" measures during 2014 which reflect the decline in refinancing following the rise in mortgage rates in the 2nd half of 2013. Refinancing is a portion of the market in which the FHA has historically played a minor role.
FHA's role as a mortgage insurer, one it shares primarily with the Veterans Administration and private mortgage insurance carriers, peaked in 2009 at 70.7 percent and declined to 34.1 percent by late 2014. The VA's share of the MI market nearly doubled over this time frame with the expanded military over the last decade.
When that role as insurer is measured by unit count FHA's share peaked at nearly 72 percent of the market in 2008 and has fallen steadily since as private mortgage insurers moved back into the market with better pricing than FHA. Fears says he could not update the table (The private mortgage insurance trade organization was a victim of the recession), but the trend was apparent "and one can infer based on the other measures that this measure would decline as well.
Fears concludes that FHA's market share which expanded as private mortgage insurance companies were hit hard by defaults (several collapsed) and limited in their ability to insure new business or raise capital. "However, since 2011, the PMIs have recapitalized and expanded, repeatedly adding new products and reducing pricing. Today, the FHA's role has declined significantly to within range of its historical role by several measures. Changes to the PMI's capital requirements and pricing at the GSEs will likely improve their competitiveness, further shaping the FHA's market share in the future."