Eye On Housing
Recent data released under the Home Mortgage Disclosure Act (HMDA) on mortgage loans indicates that the FHA-insured share of all 1-4 family mortgage originations in owner-occupied homes increased in 2015. At the same time, refinancings relative to home purchase and home improvement mortgages also rose, especially for FHA-insured mortgages.
The HMDA was enacted by Congress in 1975 and was implemented by the Federal Reserve Board’s Regulation C. On July 21, 2011, the rule-writing authority of Regulation C was transferred to the Consumer Financial Protection Bureau. This regulation provides the public with loan data that can be used to assist in determining whether financial institutions are serving the housing needs of their communities. The extensive coverage of this data is one reason analysts also use the mortgage data provided under HMDA to both understand trends in the mortgage market and as a comparison against separate data collection efforts.
In the most recent release, covering mortgage originations taking place in 2015, the FHA-insured mortgage share of 1-4 family owner-occupied homes rose. As shown in Figure 1 above, the FHA-insured share of mortgages for 1-4 family owner-occupied homes rose from 16% to 20%*. The gains in the FHA-insured share of 1-4 mortgages were responsible for eroding the conventional mortgage footprint, which fell from 72% to 69%, and the proportion of USDA mortgages, FSA and RHS originations. The share of FSA and RHS mortgages dropped to 2% in 2015 from 3% in 2014.
The overall expansion in the portion of mortgage originations for 1-4 family owner-occupied homes that are FHA-insured reflected an increase in its share of home purchase mortgages, refinancings, and home improvements. The increase in the share insured by the FHA was largely responsible for eroding the proportion held by conventional mortgages. The share of FSA and RHS mortgages for home purchase of 1-4 family owner-occupied homes generall fell while the share of VA-guaranteed mortgages held steady, except in home improvements where the VA-guaranteed share rose.
Figure 1 indicates that both the FHA-insured home purchase share and the refinancing share increased. Analysis, here and here, has pointed to the decline in FHA’s mortgage insurance premium (MIP) as a reason behind the increase in the FHA-insured market share. Mortgage insurance is the amount, expressed in percentage points, a borrower has to pay to insure the lender against the possibility of a mortgage default. Generally, borrowers pay for private mortgage insurance (PMI) on conventional loans if the loan-to-value ratio exceeds 80%. On FHA loans, the typical borrower is required to pay the MIP over the life of the mortgage**. In January 2015, FHA reduced its annual MIP from 1.35% to 0.85%***.
Information collected under the HMDA also indicates that the portion of refinancings of 1-4 family mortgage originations for owner-occupancy also increased in 2015. Figure 2 above indicates that the share of refinancings rose by 5 percentage points over the year, from 39% in 2014 to 44% in 2015, as mortgage rates fell and credit availability for a home purchase mortgage remains tight. The increase in the proportion of refinancings was offset by a decrease in the percentage of home purchase mortgage originations while the share of home improvement mortgage originations held steady.
Most loan types recorded an increase in refinancing mortgage originations, but the compositional change in FHA-insured mortgages was greatest. As illustrated by Figure 3 above, the proportion of home purchase conventional mortgage originations for 1-4 family owner-occupied homes fell by 5 percentage points while the proportion for VA-guaranteed mortgages shrank by 6 percentage points. The declining portion of home purchase mortgages was offset by an increasing share of refinancings. Moreover, the compositional changes in both the conventional and VA-guaranteed mortgages are similar to the overall redistribution shown in Figure 2a and 2b.
However, FHA-insured mortgages saw a greater change in its mortgage composition. As shown in Figure 3, the share of FHA-insured home purchase mortgages for 1-4 family owner-occupied homes fell by 10 percentage points from 76% in 2014 to 66% in 2015. Conversely, the share of refinancings expanded from 22% in 2014 to 33% in 2015.
Although Figure 1 illustrated that the FHA-insured share of both total home purchase originations and total refinancing originations increased, Figure 3 shows that within FHA-insured mortgage originations, refinancings rose comparatively faster. The refi share of all FHA-insured loans expanded by twice the rate of the increase in refinancing mortgage originations for 1-4 family owner-occupied housing overall, 11 percentage points in FHA-insured refinancings compared to 5 percentage points in refinancings overall.
Part of the share increase in FHA-insured refinancings relative to other FHA-insured mortgages may be consistent with the expansion observed in both conventional and VA- guaranteed mortgages, which both recorded refinancing share increases in line with the overall increase. At the same time, the greater than average switch from home purchase originations to refinancing originations within the FHA-insured originations category may also reflect the lowering of the annual MIP as borrowers may have refinanced their home with an FHA-insured mortgage in order to take advantage of the lower insurance premium.
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* FHA refers to the Federal Housing Administration, FSA stands for Farm Service Agency, and RHS refers to the Rural Housing Service.
** If the loan-to-value ratio on an FHA-insured loan is less than or equal to 90% at origination than the borrower is only required to pay the annual mortgage insurance premium for 11 years. However if the loan-to-value ratio exceeds 90% at origination then the borrower is required to pay the annual mortgage insurance premium over the life of the loan. FHA-insured loans are popular partly because they only require a down payment of 3.5%.
*** Borrowers of FHA-insured loans are also required to pay an upfront mortgage insurance premium of 1.75%, unchanged following the January 2015 rule change.
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