Federal Housing Administration lending is reclaiming center stage in the residential mortgage market. The government-insured share of mortgage applications tripled in the past year, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey. Of all mortgage applications accepted during the month of July 2008, 29.1 percent were for government-insured loans (consisting of mostly FHA loans) compared to 8.4 percent in July 2007. The MBA said the government-insured share began increasing in February 2007.

According to the MBA survey, which covers approximately 50 percent of all U.S. retail residential mortgage applications and has been conducted weekly since 1990, the lowest recorded share was 5.8 percent in August 2005 and the highest was 43.8 percent in February 1990.

The MBA highlighted the following reasons behind the FHA’s resurgence:

• In March, the Economic Stimulus Act of 2008 temporarily raised the FHA and conforming loan limits for most areas in the country, which broadened FHA financing for more borrowers. (Note the Housing Bill signed into law on July 30 makes these higher loan limits permanent.)
• Data from the U.S. Department of Housing and Urban Development (HUD) show that the level of conventional to FHA refinance applications has increased 317 percent on a year over year basis in July, the bulk of which is likely from subprime ARM products. Similarly, the level of conventional to FHA refinance endorsements has increased 260.8 percent on a year over year basis. Based on the MBA survey, application volume for government-insured loans was up 133.9 percent in July from a year ago, while application volume for conventional loans was down 50.2 percent, evidence of a shift from conventional to government-insured mortgages.
• FHA loans typically have lower down payments than those offered by Fannie Mae and Freddie Mac. Generally the maximum loan to value (LTV) ratio for FHA loans is 97 percent and 95 percent for the Government Sponsored Enterprises (GSEs).
• Conventional GSE loans typically have higher credit score requirements than FHA loans.

FHA’s figures show the same trend. In a speech last month to the FDIC’s forum on mortgage lending for low-and-moderate-income households, FHA Commissioner Brian Montgomery said the FHA market share had increased from under 2 percent in 2006 to about 10 percent in July 2008. Montgomery also noted that FHA estimates indicate FHA had lost 70 percent of its business from 2003-2006.

“In the first half of the decade, the housing market was booming here and abroad, and world wide equity in the top 20 countries had increased from $40 trillion to $70 trillion. There had been an $8 trillion increase in the market value of single family homes in the United States alone. And while all this was going on, in 2006 our market share at FHA was under 2 percent. We were marginalized during the boom, unable to compete because of low loan limits and higher downpayment requirements,” Montgomery added.