FHA Lending: Evidence from the 2008 HMDA Data

Robert B. Avery

HUD 2010 National Fair Housing Policy ConferenceNew OrleansJuly 22, 2010

The views expressed are those of the author and do not necessarily represent those of the Board of Governors of the Federal Reserve System or its staff. This presentation draws on joint work

with Kenneth P Brevoort, Glenn B. Canner, Neil Bhutta and Crista N.Gibbs.

Broad Trends in 2008

• Retrenchment in conventional lending market – Home purchase and refinance loans fell nearly 40 percent– Share fell from 93 percent to 76 percent

• FHA-insured lending expanded considerably– Loan volume tripled– Share increased from 6 percent to 21 percent

• VA-guaranteed lending– Increased 50 percent over 2007– Share increased to 3 percent of lending in 2008

How did Lending Change Across Groups?

• Total home purchase lending fell between 2007 and 2008 for all demographic and neighborhood groups

• Some groups experienced larger declines than others

Change in Lending by Race and Income

Change in Lending by Neighborhood

HMDA Price Reporting

• Prices reported as spreads over yields on comparable maturity Treasury securities

• Spreads are reported if they exceed predefined thresholds—termed “higher-priced”

• We compute an “adjusted” measure of higher-priced loans defined as those with an APR 175 basis points above the APR of a Freddie-mac defined “prime” Loan

Change in Incidence of Higher-Priced Lending

Year Title Higher-Priced

Incidence

Adjusted Higher-Price

Incidence All Loans

2006

Ind. Mort. Company 39.1 35.3 31.7

Depository 18.0 14.7 42.9

Total 27.1 23.5 100.0

2007

Ind. Mort. Company 18.2 15.7 20.5

Depository 14.2 11.2 56.5

Total 17.7 14.8 100.0

2008

Ind. Mort. Company 9.2 3.3 21.5

Depository 9.9 5.6 65.3

Total 10.7 6.0 100.0

The Surge In FHA and VA Lending

What Caused the Surge?

• One possibility is the increase in loan size limits in the Economic Stimulus Act of 2008– Limits raised up to $729,750 in certain areas– Increase for FHA, GSEs, and VA– New limits released on March 6, 2008

• To test this, loans were placed into four categories1. FHA eligible in 2007 & 2008;

2. Newly FHA eligible;

3. Newly GSE and FHA eligible; and

4. Other eligibility or no change

Change in Home Purchase Lending by Loan Size

Title and Year

FHA Eligible

Newly FHA

Eligible

Newly GSE & FHA

Eligible Other

FHA 2007 96.7 2.4 0.2 0.7

2008 88.7 8.1 1.6 1.6

VA 2007 76.2 18.7 0.1 5.1

2008 74.9 17.7 1.3 6.1

GSE 2007 77.1 16.7 0.3 6.0

2008 70.1 19.3 2.2 8.5

Total 2007 73.2 13.7 3.6 9.5

2008 75.3 14.0 2.4 8.3

A Second Possibility

• With losses mounting, PMI companies started raising prices in the spring of 2008

• GSEs also raised their underwriting fees for high-LTV loans in March 2008– Further increases in June 2008

• Both FHA and VA programs offer a form of credit insurance that competes with PMI– PMI cutbacks and GSE fee increases may have encouraged

greater use of FHA & VA

The Surge in FHA and VA

Surge in FHA Refinance Lending

Using PMI Data Reported with HMDA

• To examine the relationship between PMI and the surge, we use HMDA data filed by PMI industry– Data provide disposition of applications for mortgage insurance

• Sharp reduction in PMI issuance consistent with PMI role in surge– Ratio of PMI to conventional home purchase lending fell from

0.60 in January to 0.27 in December

• Strong correlation between declines in county-level PMI issuance and FHA home purchase increases– Relationship does not hold for refinance lending

Using McDash Data (LPS)

• LPS collects data from several large mortgage servicers– Includes information on LTV and borrower credit scores

• FHA’s share of loans with LTVs of 80 percent or below increased– 1 percent in 2007– 9 percent in 2008

• GSEs share of loans with LTVs of 80 percent or below held steady– Maintained share around 80 percent

LPS Home Purchase: Share of High-LTV Lending

So Where Have These Loans Gone?

• Some believe that the expansion of FHA has been to high-risk borrowers who have limited options– Suggests FHA is the “new subprime”

• HMDA data can be used to examine two dimensions of loan quality– Loan pricing information in HMDA may be used to infer risk– With assumptions on loan interest rates based on the date, a

payment-to-income (PTI) ratio can be calculated

Loan Pricing – Home Purchase

Agency and Year Reported Higher Priced

Adjusted Higher Priced PMMS + 2.75

FHA 2007 4.3 2.1 0.3

2008 11.6 2.3 0.3

VA 2007 0.2 0.1 0.1

2008 1.3 0.3 0.2

GSE 2007 9.0 6.6 2.2

2008 5.1 2.0 0.3

Total 2007 12.7 10.3 5.6

2008 8.1 3.3 1.1

Payment-to-Income Ratios

Agency and Year Home Purchase Refinance

FHA 2007 9.4 11.2

2008 11.3 12.5

VA 2007 17.9 6.6

2008 15.8 3.7

GSE 2007 14.9 17.1

2008 13.5 12.9

Total 2007 16.2 21.9

2008 13.2 13.1

Additional Info on FHA/VA Loan Quality

• LPS data can be used to examine two common measures of loan riskiness– Loan-to-value (LTV) ratio– Borrower credit score (FICO)

• Data on LTVs suggest that FHA lending continues to involve low levels of equity in the home– Share of FHA home purchase loans with LTVs>95 percent fell

from 72 to 67 percent– Share of VA home purchase loans fell from 90 to 86 percent

LPS Data on Credit Scores

What Does This Tell Us About Loan Quality?

• Evidence suggests that FHA is not the “new subprime”

• It is important to keep in mind that while these data suggest the expansion of FHA and VA has been primarily to high-credit-score borrowers, the performance of loans depend upon many factors, such as the future path of house prices and economic activity

• Predicting how FHA and VA loans will perform is beyond the scope of the current article

Which Borrowers Took Up FHA Loans: Race or Ethnicity

Which Borrowers Took Up FHA Loans: Income