From FHA to Subprime and Back?

43 Pages Posted: 22 Mar 2009

See all articles by Peter M. Zorn

Peter M. Zorn

affiliation not provided to SSRN

Rajeev Darolia

Martin School of Public Policy

Marsha Courchane

Charles River Associates (CRA)

Date Written: March 19, 2009


The Federal Housing Administration ("FHA") offers mortgages insured by the federal government for a segment of the residential mortgage market. Its share of the market for residential mortgages declined substantially from 1997 through 2007, most significantly among minority borrowers who accounted for a growing share of subprime loans during that period. Specifically, FHA's market share in terms of numbers of loans fell from 14 percent in 1997 to 5 percent in 2007, with almost the entire decline occurring since 2000. After that time, in part due to the collapse of the subprime market and in part due to tightened prime market underwriting standards, FHA mortgage loan originations have surged. By the 4th quarter of 2008, FHA/VA organizations comprised 33.6 percent of the market, and reached an annual share for 2008 of 19.5 percent.

During the same 11-year period, the general pattern of declining market share in the entire nation for FHA and increasing market share for conventional prime and subprime loans held in submarkets where FHA traditionally has played a major role. For example, among minorities, FHA's market share fell 18 percentage points (from 21 to 3 percent), while the share of minority loans that were in the prime market increased from 57 to 76 percent for all minorities. The drop in FHA's market share was particularly large - 34 percentage points - among Hispanic borrowers, dropping from 37 percent to 3 percent of Hispanic loans. Both African Americans and Hispanics had increased shares of subprime loans over this period. FHA provided, historically, products for first time home buyers as well, often those with limited down payments available. As subprime lending has ceased for the most part, and prime lending has tightened standards, the access to funds for home ownership may increasingly become difficult for vulnerable populations.

As U.S. housing markets are grappling with unprecedented changes in liquidity and credit constraints, policy solutions are being offered on an increasingly frequent basis. Some of those policy solutions focus on whether or not FHA lending with Ginnie Mae securitization could supplant the current roles served by Fannie Mae and Freddie Mac with their securitizations of conventional, conforming loans. To better inform the policy debate, we document how markets have changed and what challenges remain for providing access to sustainable home ownership.

Keywords: FHA, Subprime Lending, Mortgage Markets

JEL Classification: G21, G28

Suggested Citation

Zorn, Peter M. and Darolia, Rajeev and Courchane, Marsha, From FHA to Subprime and Back? (March 19, 2009). Available at SSRN: or

Peter M. Zorn

affiliation not provided to SSRN

Rajeev Darolia

Martin School of Public Policy ( email )

Lexington, KY 40506
United States

Marsha Courchane (Contact Author)

Charles River Associates (CRA) ( email )

1201 F Street, NW
Suite 700
Washington, DC 20004
United States

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