The market share of government loans dropped sharply in the first quarter of 1995, to 12% from 17% a year earlier, according to a recent survey.

TRW Redi Property Data, a real estate research group based in Riverside, Calif., has statistics showing the volume of Federal Housing Administration and Veterans Administration loans declined 70% during the first three months of 1995, while originations of all loans declined only 51%.

The survey looked at loans originated in major metropolitan areas in Virginia, New Jersey, Texas, Nevada, Arizona, and Colorado, and all loans in Florida and California.

David Lereah, chief economist at the Mortgage Bankers Association of America, said FHA loans did better than all loans in the first quarter of 1994 and thus had farther to drop than other loans in the first quarter 1995.

Mr. Lereah said that in the first quarter this year, lenders were competing for "a share of a smaller pie, so they were easing credit standards, putting bells and whistles on" conventional loans. Credit standards of government loans are not as flexible, he said, so it was not as easy to change the FHA product to reflect the competitive market in the first quarter of 1995.

The largest decline in government loans was in Colorado, with an 80% drop. Government loans did best in New Jersey, which only experienced a 3% decline from the level in the year-earlier period. Lenders suspect that the loan limit for FHA loans did not keep up with the rising costs of homes in Colorado. The limit for these loans has been raised in the last two months, which should result in more originations.

Jeffrey May, president and chief operating officer at Cherry Creek Mortgage Co., Denver, said he had not noticed a decline in FHA loan originations in the first quarter this year, but said he suspected the reported decline came because the Federal National Mortgage Association's community homebuyer program took some borrowers from the FHA market. He also cited rising home costs.

"The recently increased FHA amount was substantial in some cities," Mr. May said, adding that he expects a dramatic increase in FHA originations as a direct result.

Another Colorado lender has experienced a significant and steady drop in FHA originations since the middle of 1993. He attributed the rising home cost to the decline in FHA loans, but also said the FHA loan insurance structure made the loans more expensive than others.

Gene Humphries, executive vice president at First Colorado Mortgage Corp., said his FHA originations dropped from about 40% of the lender's total originations to about 15% in just two years.

"Fannie Mae, Freddie Mac, and private sources have become more aggressive in lending criteria to low-down-payment purchasers" that are usually targeted by FHA, Mr. Humphries said. Other sources can now originate the loans less expensively than FHA, he said, so borrowers choose other loans.

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