The mortgage market is broadly divided into two markets: The government-insured segment, in which the lender is protected from borrower default by insurance from either the Federal Housing Administration or Veterans Administration programs; and the conventional loan market.
In recent years, the conventional-loan market share has grown, while that of the FHA and VA has decreased. This trend has resulted in a decline in Government National Mortgage Assn. market share as well, because Ginnie. Mae issues securities exclusively composed of FHA and VA loans.
Conventional loans often receive mortgage insurance to protect the lender from default, but it is supplied by private mortgage insurance companies like Mortgage Guaranty Insurance Corp. and Commonwealth Mortgage Assurance Corp.
Private mortgage insurers' market share has been increasing for several reasons. In particular, costs to the borrower are significantly lower than those related to FHA insurance; thus, a borrower who qualifies for private mortgage insurance will take it over FHA insurance.
Therefore, if the FHA loan limits are increased, the net impact should be to expand the availability of mortgage credit to first-time homebuyers rather than to take market share from private mortgage insurers.
Legislation likely will be passed this year, increasing ceiling amounts on loans the FHA can insure. The current limits are $67,500 in most parts of the country and $151,000 for "high-cost" coastal housing markets.
The increases being considered would raise the regular limit to between $77,000 and $100,000, and the high-cost limit to between $151,000 and $172,000. These new limits are based on ratios relative to current lending limits of government-sponsored enterprises set at $203,150 nationwide.
Future Levels Debated
There seems to be disagreement among various factions over whether the increase for regular limits should be set at 38% or 50% of the GSE limit. There is also debate over whether the high-cost limit should be 75% or 85% of GSE limits.
Compromises expected on this issue could set the limits at about the midpoint of the two ranges. Bear in mind that in 1993, the median sales prices for new and existing homes in the United States were $126,000 and $107,000, respectively.
So what is the investment conclusion?-Higher loan limits for the FHA program, all else being equal, should serve to boost the FHA market share relative to-the-alternative mortgage insurance programs available from the private mortgage companies like MGIC and CMAC.
In turn, the more loan volume that the FHA insures, the more loans find their way to Ginnie Mae than to Federal National Mortgage Association and Federal Home Loan Mortgage Corp.
However, all else is not equal, because FHA insurance fees are considerably higher than private mortgage insurance fees; therefore a borrower, if properly informed at the point of sale and if qualified to meet the mortgage insurance underwriting standards, would opt for private mortgage insurance. Fannie Mae and Freddie Mac are working on programs to educate and train inner city lenders to provide their mortgage borrower customers with full disclosure as to economic advantages of getting private mortgage insurance if they qualify.
In addition, pricing and execution on Fannie Mae and Freddie Mac securities are better than on Ginnie Mae's in the secondary market largely due to the technological execution advantages the two GSEs have.
Thus, FHA and Ginnie Mae loans outstanding actually have declined in recent years despite the record loan volume of the past few years.
As such, our conclusion is that Fannie Mae and Freddie Mac have more to gain from increased information flow to the traditional FHA borrower, who can be pulled into the conventional loan market, than to lose from marginally more borrowers now failing within the upward revised FHA loan limits.
Chances are that the borrowers who benefit from the increased loan limits would opt for mortgage insurance companies unless they failed to meet the underwriting criteria.