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FHA Lending: Evidence from the 2008 HMDA Data

FHA Lending: Evidence from the 2008 HMDA Data. Robert B. Avery HUD 2010 National Fair Housing Policy Conference New Orleans July 22, 2010.

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FHA Lending: Evidence from the 2008 HMDA Data

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  1. FHA Lending: Evidence from the 2008 HMDA Data Robert B. Avery HUD 2010 National Fair Housing Policy Conference New Orleans July 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.

  2. 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

  3. 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

  4. Change in Lending by Race and Income

  5. Change in Lending by Neighborhood

  6. 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

  7. Change in Incidence of Higher-Priced Lending

  8. The Surge In FHA and VA Lending

  9. 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 categories • FHA eligible in 2007 & 2008; • Newly FHA eligible; • Newly GSE and FHA eligible; and • Other eligibility or no change

  10. Change in Home Purchase Lending by Loan Size

  11. 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

  12. The Surge in FHA and VA

  13. Surge in FHA Refinance Lending

  14. 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

  15. 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

  16. LPS Home Purchase: Share of High-LTV Lending

  17. 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

  18. Loan Pricing – Home Purchase

  19. Payment-to-Income Ratios

  20. 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

  21. LPS Data on Credit Scores

  22. 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

  23. Which Borrowers Took Up FHA Loans: Race or Ethnicity

  24. Which Borrowers Took Up FHA Loans: Income

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