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FHA’s market share has been dropping

The three biggest players in the mortgage industry — the Federal Housing Administration (FHA) and the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac — have engaged in a battle of supremacy throughout the housing recovery. According to some market studies, however, FHA has been increasingly on the losing end. 

FHAshareThe GSEs made moves last year to loosen their standards by accepting borrowers with higher debt loads in relation to a property’s value and the borrower’s income. This has steered some borrowers away from the FHA and toward conventional loans that the GSEs purchase and securitize. The GSE’s loan programs for first-time homebuyers featuring a 3 percent downpayment also have taken away some of FHA’s dominance in the low-downpayment, higher-risk segment of the market.

Some market factors also could be working disproportionately against the FHA loan program, including higher home prices, a dearth of affordable homes for sale and still fairly tight credit conditions. The Urban Institute, for example, has said that FHA has lagged behind the GSEs in providing clarity about its program. Banks and other major lenders have pulled back on FHA lending or imposed tighter standards beyond the program’s guidelines, fearing stiff regulatory penalties or being forced to cover all the losses should the loans default.

“The FHA share of loans is down because of a combination of two factors,” said Daren Blomquist, senior vice president for Attom Data Solutions. “The housing market continues to be a tough environment for low-downpayment buyers to compete — particularly low-downpayment buyers with lower credit scores. Secondly, that still-small pie of first-time homebuyers is being divided up into more pieces by additional low-downpayment programs that are coming online.”

The relative market share of the government programs can play into policy debates. In the case of FHA, some mortgage trade groups have been advocating for further premium cuts, which would naturally increase FHA's appeal and market size. Others, like the private mortgage insurance lobby, say that the FHA's market share is artificially high.

This year, all the government programs and the GSEs have been fighting over a shrinking pie. Overall originations, in terms of loan counts and dollar volume, are expected to decline, driven by a projected 30 percent year-over-year drop in refinancing activity. In terms of the battle for market share within this diminishing pie, FHA’s loan has lost some ground to the GSEs, according to Attom Data Solutions and other market reports. 

Mixed data 

The data on market share isn't consistent, and tends to reflect conditions several months ago. Mortgage-application data through August 2017 from the Mortgage Bankers Association (MBA) suggests that FHA’s share of overall mortgage applications dropped by around 5 percentage points in roughly two and half years.

“This share has dropped some, but still remains at around 10 percent of the total,” MBA Chief Economist Mike Fratantoni said. FHA’s share of the refinance market fell more than a percentage point last summer, to just over 8 percent.

“With the run up in rates, and also with the rapid growth in home prices, FHA borrowers are likely less inclined to refinance into another FHA loan, as some may now be able to qualify for a conventional loan given the growth in their home equity,” Fratantoni said.

The data from the U.S. Department of Housing and Urban Development (HUD) indicates that FHA’s market share is still elevated. HUD reports quarterly estimates of FHA’s market share based on the loan counts and volume figures compiled by the FHA’s insurance data, and compares its numbers against the origination estimates for the entire mortgage market provided by other sources. The most recent data available is for third-quarter 2017.

In that quarter, FHA’s market share in terms of overall loan counts, including purchase and refinance loans, was 18.7 percent, which was a higher market share than the average for each of the previous eight years to 2009. In terms of dollar volume, FHA’s market share as of the third quarter 2017 was 13.4 percent, which was identical to its 2016 average, 50 basis points lower than the average volume for 2015, but higher than each of the four years prior to 2015, HUD data suggests.

Prior the Great Recession and collapse of the subprime market, FHA’s market share was traditionally under 10 percent of the market, HUD data suggests. In terms of loan counts, the program grew from just 3.1 percent during the last housing boom in 2005 to 21 percent of all loans in 2009. At its height, FHA accounted for 33 percent of all loans used to purchase a home. FHA’s market share declined after 2010, and fell to just under 13 percent, before receiving another boost in 2015 through an insurance premium cut.

Ed Pinto, co-director of the American Enterprise Institute’s (AEI’s) Center on Housing Markets and Finance, said the recent battle between the GSEs and FHA is nuanced. AEI keeps a database of millions of loans that it monitors to evaluate the level of risk to the mortgage market.

Pinto said FHA has been losing some of its “subprime” home-purchase customers to Fannie Mae. Fannie Mae, in turn, has been losing “prime,” less risky home-purchase customers to Freddie Mac. Pinto said this is likely related to bond pricing. Fannie has lost the advantage in the bond market it once held because of its larger size.

AEI estimated that Freddie gained more than 5 percentage points in market share year to date through September 2017, and held roughly 28 percent of the home-purchase market. During roughly the same time frame, Fannie lost about five percentage points, with its share falling below 35 percent. The FHA share has dropped from a high of 30 percent in home purchase-loan share to 23 percent in September.

“The fact is that Freddie’s pricing relative to Fannie has gotten a lot better,” Pinto said. “It used to be worse, and now they are a fair amount better. That is showing up in their plain vanilla market share. For the same reason, Fannie has been more aggressive, for whatever reason, they have been getting more of the high-risk loans. We now have this anomaly, where Freddie has picked up [market] share quite significantly and Fannie has picked up risk.”


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