The Federal Housing Administration (FHA) and Risky Lending

Darryl E. Getter
Specialist in Financial Economics

The Federal Housing Administration (FHA), an office within the Department of Housing and Urban Development (HUD), is a federally operated mortgage insurance program that primarily serves first-time and less-creditworthy homeowners. Home buyers pay mortgage insurance premiums to FHA, which insures lenders against homeowner mortgage default risk. FHA has recently seen a surge in its guarantee volume. HUD estimates that its share of the single-family mortgage market, which includes both purchases and refinances of single-family homes, increased from 1.9% in 2005 to 24.0% by the fourth quarter of 2008. The increasing market share and absolute level of business may be explained by FHA having the lowest down payment requirements in the industry as well as by the contraction of financial sector mortgage lending capacity in 2008.

Recent developments raise concerns about FHA's ability to insure loans that may be relatively more risky, given the lower downpayment requirements. The FHA guarantee is backed by the U.S. federal government, and risky loans could possibly translate into large losses for the program and for taxpayers if a large number of borrowers default. Consequently, on October 1, 2009, Representative Scott Garrett introduced H.R. 3706, the FHA Taxpayer Protection Act of 2009, which would require FHA single-family borrowers to make down payments of at least 5% and would prohibit financing of closing costs under such mortgages. On March 10, 2010, Representative Shelley Moore Capito introduced H.R. 4811, the FHA Safety and Soundness and Taxpayer Protection Act of 2010, which would require FHA to appoint a Deputy Assistant Secretary for Risk Management and give FHA the authority to increase annual insurance premiums. On April 20, 2010, Representative Maxine Waters introduced H.R. 5072, the FHA Reform Act of 2010, which would also give FHA the authority to increase annual insurance premiums among other things. H.R. 5072 was reported in the House on May 6, 2010.

This report reviews factors such as underwriting practices to determine the extent to which they may contribute to non-performing FHA-insured loans. The first section describes features of traditional subprime lending and makes comparisons to FHA-insured loans. Next, FHA and very high- risk mortgage underwriting practices are compared. Recent information on FHA underwriting practices and the performance of its insured loans follows.


Date of Report: June 4, 2010
Number of Pages: 14
Order Number: R40937
Price: $29.95

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