Competition and Risk Factors in Mortgage Lending: The Federal Housing Administration’s Evolving Role in the Primary Market

42 Pages Posted: 19 Feb 2010

See all articles by Brent C. Smith

Brent C. Smith

Virginia Commonwealth University

Date Written: Novermber 9, 2009

Abstract

This paper presents an analysis of the distribution of home purchase mortgages insured by the Federal Housing Administration (FHA) in the primary mortgage market. Utilizing a sample of loan originations aggregated at the zip code level, the distribution of the market served by FHA and conventional lenders is compared across the State of Florida. Results indicate that FHA market shares are concentrated in zip codes with higher economic risk characteristics and obtained by high risk borrowers over the observation with evidence of market share contraction over the observation period. Unexpectedly, the analysis also reveals that FHA loan distribution fails to exhibit a targeted racial bias toward minority neighborhoods. One potential conclusion is that FHA was forced to accept lower quality loans as competition from more nimble private lenders with lower access hurdles and more rapid processing expanded into markets traditionally served by FHA.

Keywords: Residential Mortgage Markets, Public Policy, Housing, Federal Housing Administration, Affordable Housing, Housing and Urban Development

JEL Classification: G21, G28, K11, R20

Suggested Citation

Smith, Brent C., Competition and Risk Factors in Mortgage Lending: The Federal Housing Administration’s Evolving Role in the Primary Market (Novermber 9, 2009). Available at SSRN: https://ssrn.com/abstract=1554529 or http://dx.doi.org/10.2139/ssrn.1554529

Brent C. Smith (Contact Author)

Virginia Commonwealth University ( email )

1015 Floyd Avenue
Richmond, VA 23284
United States

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