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FHA loan volumes cool off

Federal Housing Administration (FHA) loans last saw a surge in borrower interest after the Obama administration slashed insurance premiums for the loan program in early 2015. In recent quarters, the FHA loan numbers have retrenched, along with the rest of the mortgage market.

FHA recently reported that it endorsed 305,438 mortgages, excluding reverse mortgages, between the April-to-June 2017 period (the federal third fiscal quarter), down 3.7 percent compared to the 2016 level for the same months.

fhaactivityThe volume of loans — or the balances at origination — also fell year over year by 1.1 percent, to $61.5 billion.

The decline in overall endorsements in the fiscal third quarter was driven by a steep drop in FHA-to-FHA refinances, which follows with the lesser rate-and-term refinancing that the entire mortgage market is seeing. FHA-to-FHA endorsement counts in the fiscal third quarter dropped 33 percent year over year, to 43,997. By contrast, home-purchase loans rose by 2.3 percent year over year in the fiscal third quarter, to 230,392 purchases. FHA origination trends are following general market trends.

“We believe that some of that dip has to do with the seasonality and softening of housing sales, but we also think that with rates having spiked somewhat in October, new applications for refis did slow down,” said  Daniel Jacobs, executive vice president with MiMutual Mortgage. “We have certainly seen a slowdown due to those macro things.” 

Jacobs said his company is closing on fewer FHA loans as a percentage of its overall loan business this year, however. The company’s FHA volume represented over 50 percent of the company’s total volume last year. That share is down this year by about 5 to 7 percentage points. MiMutual does mostly purchase originations. He said a few borrowers that are good candidates for the FHA program are opting to go with Fannie Mae and Freddie Mac’s conventional, low-downpayment loans, but not in significant numbers.

“There is a small amount of that, but FHA continues to be a first-time homebuyer favorite,” Jacobs said.

FHA's declining market share

FHA activity has been watched closely. It has traditionally been the first choice for first-time borrowers because of the low downpayment options and more flexible underwriting. There has been a debate in the industry as to whether the Trump administration should reinstate a proposed insurance cut to spur more activity. In the final days of the Obama administration, FHA’s overseer, the U.S. Department of Housing and Urban Development (HUD), proposed a 25 basis point cut. HUD immediately suspended that cut once Trump assumed office.

Through 2015 and 2016, the FHA's market share increased after the Obama administration cut the loan program's annual loan-insurance premium by 50 basis points, to 0.85 percent. Supporters of another cut say that it will attract new borrowers and improve affordability. Opponents of another cut say FHA didn’t draw a significant number of new borrowers from the last insurance cut, but poached customers from Fannie and Freddie’s low-downpayment programs that use private insurance. Some industry groups say another cut to premiums would also put stress on the insurance fund.

Attom Data Solutions reported that the FHA share in home purchases was 13.5 percent in the quarter ending in September, the lowest mark since the start of 2015. This is an indicator that the insurance cut stimulated demand in the short term, but did not have “a long-term effect on prompting prospective first time homebuyers to get off the fence,” said Daren Blomquist, senior vice president with Attom Data Solutions.

“Fundamentally, this continues to be a housing recovery that is happening in spite of weak demand from new homeowners,” Blomquist said. “Additionally, banks have cautiously started to introduce their own proprietary loan products geared toward first time homebuyers, taking some share away from FHA.”

FHA’s market share has been moving back toward what it was prior to the 2015 premium cut.

“It has been trending down slowly,” said Ed Pinto, co-director of the International Center on Housing Risk, which tracks FHA loan data closely. The center's loan-data pegs the FHA market share in purchase originations at a much higher 25 percent, down from the peak of 29 percent. The FHA share in home purchases is still about 1 percentage point above its share prior to the insurance cut, Pinto said. 

“They are still ahead of where they were when they dropped their premium,” Pinto said. “It (the boost) has worn off largely.”

The Mortgage Bankers Association is forecasting that FHA’s overall market share will increase this year to 14.6 percent, up from 12.5 percent in 2016 and the highest percentage share in four years. 


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