FHA Losing Market Share

by Peter G. Miller
April 23rd, 2011

FHA officials should be elated. Their stated goal to surrender mortgage originations to the private sector is coming true.


Oh wait, no yippees quite yet. Having a weaker FHA does not benefit borrowers.

The latest figures from HUD show that FHA applications for March were down 35.7 percent. Endorsements–loans actually made–were off 25.1 percent.

The National Association of Realtors reported that 4.25 million existing homes were sold in February, down a touch from 4.37 million units in February 2010.

So how does this happen? You can understand that FHA originations might rise of fall, but why is the fall so significant at a time when the real estate marketplace is stagnant.

This is not a minor manner. HUD Secretary Shaun Donovan told Congress recently that “over the last two years, FHA has helped over 2 million families buy a home – 80 percent of whom were first-time buyers. FHA also has helped nearly 1.5 million existing homeowners refinance into stable, affordable products, with monthly savings exceeding $100 in most cases. FHA financing was used by 38 percent of all homebuyers, insuring, along with the VA and federal farm programs, 81 percent of all loans to African Americans and 73 percent to Hispanics in 2009. But FHA is also a vital resource for homeowners facing foreclosure. FHA’s loss mitigation program minimizes the risk that financially struggling borrowers go into foreclosure. Since the start of the mortgage crisis, it has helped more than half a million homeowners.”

The Private Sector

“It is critical, however, that we pave the way toward a robust private mortgage market,” said Donovan, who then added:

“Taking steps to bring private capital back is a process that HUD began many months ago – and I want to thank you for passing legislation in the last Congress to provide more flexibility to FHA’s mortgage insurance premium structure. With this authority, FHA announced a premium increase of 25 basis points last month.”

Well, okay, this is the smoking gun which explains why FHA annual insurance rates are rising. Borrower costs are not being increased because of losses to reserve funds, delinquencies or foreclosures, they’re being raised so that the FHA program will be less attractive, thus pressuring borrowers to use loan products from the private sector.

Was private capital ever missing from the FHA program? Not at all. There has been no problem getting FHA loans during the past several years while the private sector survived only because of massive taxpayer loans and the ability to borrow from the federal government at near zero percent.

Still, even with a shift toward the private sector, there is no justification for the FHA to openly cede market share to the private sector. Instead, private lenders ought to be more competitive and come up with better and cheaper mortgages.

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