FHA vs. Subprime Mortgage Originations: Is FHA the Answer to Subprime Lending?
Posted: 28 Apr 2011 Last revised: 25 Aug 2022
Date Written: September 21, 2011
We analyze originations of mortgages guaranteed by the Federal Housing Administration (FHA) and of subprime mortgages - loans that dominate the non-prime mortgage market for riskier borrowers. Using home purchase and refinance loans data for 2005, we estimate that a sizeable number of borrowers who got subprime loans would have qualified for FHA loans, implying a potential net flow of borrowers from subprime to FHA, especially for refinance loans at a rate of about 30%. Also, consistent with the FHA’s modernization proposal to increase its loan limits, we find that increasing the limits on FHA loans could help to attract borrowers, mostly of home purchase loans, who are likely to be constrained by the lower-priced house limits. Our findings are generally in line with the recent increased flow of mortgages to FHA, and suggest that FHA loans could be the answer to the current subprime lending crisis.
Keywords: Subprime lending, mortgage originations, home purchase, refinance, FHA loan limits
JEL Classification: G21, G28, R21
Suggested Citation: Suggested Citation