With the recent changes to the FHA’s pricing, it’s worth reviewing the FHA’s impact on the market. There are a number of ways to measure the FHA’s market share. No matter which method is chosen, the FHA’s market share has fallen significantly since its peak, ceding way to private capital.
The FHA has two roles: to act as a source of funding for credit-worthy borrowers who face limited access from private sources, like first time, low income or minority buyers; and to provide broader access to credit when the private sector pulls back in general, typically with economic stress. As discussed in a blog post from the spring of 2013, the FHA’s market share can be measured a number of different ways. It can be viewed as a share of:
• Total home purchases
• The mortgage market: purchase money, refinances, or the combined total, or
• The market for mortgage insurance
Furthermore, each of these measures can be calculated using either the total dollar volume of originations or by the unit count of originations. This is an important distinction, as the low average dollar value of homes financed using the FHA would lower its market share using a dollar volume measure, while it would increase a market share measure calculated with units.
Based on total home sales, a unit measure, the FHA’s market share fell by half from 2010 to 2014. Cash purchases increased following the housing bust due to tightened oversight and the specter of new regulations as well as from growth in investor demand. The increase in cash purchases reduced the share of purchases that were financed. In addition, private mortgage insurers (PMIs) expanded into the higher LTV ranges after 2011. The combined effect reduced the FHA’s market share.
By focusing on the mortgage market, the impact of cash purchases can be eliminated. However, the trend persists. The FHA’s share of mortgages for purchase as well as the combined purchase and refinance indexes fell sharply from 2009 to the 3rd quarter of 2014, the most recent data available. This trend holds true whether measured by units or dollar volume. The sharp rise in the “total” measures during 2014 depicted below in green and orange reflect the decline in refinancing following the rise in mortgage rates in the 2nd half of 2013, a portion of the market in which the FHA has historically played a minor role.
Another way to measure the FHA’s share is to focus specifically on its function as a mortgage insurer. The FHA, along with the Veterans Administration and the private mortgage insurance industry, provide insurance to the lender on loans where the borrower typically has less than a 20% down payment at origination. Measuring the mortgage insurance market by dollar volume, the FHA’s market share peaked in 2009 at 70.7% before easing to 34.1% in 2014. By the end of 2014, the FHA was within range of its average share in the late 1990s. The VA’s share of the MI market nearly doubled over this time frame with the expanded military over the last decade.
Finally, the FHA’s share of the market for mortgage insurers can also be measured by unit count. By unit count, the FHA’s market share peaked at nearly 72% of the market in 2008 at the height of its countercyclical role. The FHA’s market share fell steadily thereafter as the private mortgage market thawed allowing more borrowers to take advantage of better pricing in that segment (see post here for more information). Unfortunately, the trade association for private mortgage insurers that once provided this data no longer exists, so this series was not updated. Still, the trend was apparent and one can infer based on the other measures that this measure would decline as well.
The FHA’s market share expanded sharply following the great recession as private mortgage insurers dealt with rising defaults that taxed their capital, reducing their ability to issue new endorsements and to raise new capital. However, since 2011, the PMIs have recapitalized and expanded, repeatedly adding new products and reducing pricing. Today, the FHA’s role has declined significantly to within range of its historical role by several measures. Changes to the PMI’s capital requirements and pricing at the GSEs will likely improve their competitiveness, further shaping the FHA’s market share in the future.