GAO-07-645, Federal Housing Administration: Decline in the Agency's Market Share Was Associated with Product and Process Developments of Other Mortgage Market Participants


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Market Share Was Associated with Product and Process Developments of 
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Report to Congressional Requesters:

United States Government Accountability Office:

GAO:

June 2007:

Federal Housing Administration:

Decline in the Agency's Market Share Was Associated with Product and 
Process Developments of Other Mortgage Market Participants:

FHA Market Share:

GAO-07-645:

GAO Highlights:

Highlights of GAO-07-645, a report to congressional requesters. 

Why GAO Did This Study:

The Federal Housing Administration (FHA) historically has been an 
important participant in the mortgage market, which includes loans that 
carry government insurance or guarantees (such as FHA-insured 
mortgages) and those that do not (conventional mortgages). The 
conventional market comprises prime loans for the most creditworthy 
borrowers and subprime loans for borrowers with impaired credit. 
Reduced demand for FHA-insured mortgages—which are used primarily by 
borrowers who would have difficulty obtaining conventional prime 
loans—has raised questions about the agency's role in and ability to 
adapt to the mortgage market. 

This report discusses (1) trends in FHA’s share of the market for home 
purchase mortgages from 1996 through 2005, and how they compared with 
the trends for other market segments; and (2) factors associated with 
the trends in FHA’s market share and the implications of these trends 
for homebuyers and FHA. To address these objectives, GAO analyzed FHA 
and Home Mortgage Disclosure Act (HMDA) data and interviewed officials 
from FHA and other mortgage institutions.

What GAO Found:

From 1996 through 2005, FHA’s share of the market for home purchase 
mortgages in terms of numbers of loans declined 13 percentage points 
(from 19 to 6 percent), while the prime and subprime shares grew 3 and 
13 percentage points, respectively (see figure). The agency experienced 
a sharp decrease among populations where it traditionally has had a 
strong presence. For example, FHA’s market share dropped 25 percentage 
points (from 32 to 7 percent) among minority borrowers and 16 
percentage points (from 26 to 10 percent) among low- and moderate-
income borrowers. At the same time, subprime market share among these 
groups rose dramatically.

The decline in FHA’s market share was associated with a number of 
factors and has been accompanied by higher ultimate costs for certain 
conventional borrowers and a worsening in indicators of credit risk 
among FHA borrowers. More specifically, (1) FHA’s product restrictions 
and lack of process improvements relative to the conventional market 
and (2) product innovations and expanded loan origination and funding 
channels in the conventional market—coupled with interest rate and 
house price changes—provided conditions that favored conventional over 
FHA-insured mortgages. In contrast to FHA-insured loans, the majority 
of conventional subprime loans had higher ultimate costs to borrowers, 
partly because their initial low interest rates could increase 
substantially in a short period of time.

Relatively high default and foreclosure rates for subprime mortgages 
and a contraction of this market segment could shift market share to 
FHA. The extent to which this occurs will depend partly on the ability 
of FHA and other market participants to offer mortgage alternatives to 
borrowers considering or struggling to maintain higher-priced subprime 
loans. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-645].

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact William B. Shear at (202) 
512-8678 or shearw@gao.gov

[End of section]

Contents:

Letter:

Results in Brief:

Background:

FHA's Market Share Declined from 1996 through 2005, While the 
Conventional Market Share Increased, Especially among Minority and 
Lower-Income Borrowers:

The Decline in FHA's Market Share Was Associated with Several Factors 
and Has Been Accompanied by Higher Costs for Certain Conventional 
Borrowers and Increased Credit Risk for FHA:

Observations:

Agency Comments and Our Evaluation:

Appendix I: Objectives, Scope, and Methodology:

Appendix II: Data on Market Share Trends in the Mortgage Market and 
Selected Submarkets from 1996 through 2005:

Appendix III: Data on Selected Borrower and Loan Characteristics for 
FHA, Prime, and Subprime Loans, 1996 through 2005:

Appendix IV: Comments from the Department of Housing and Urban 
Development:

Appendix V: GAO Contact and Staff Acknowledgments:

Tables:

Table 1: Market Shares for Home Purchase Loans, 1996-2005:

Table 2: State-by-State FHA Market Shares and Loan Counts for Home 
Purchase Loans, 1996-2005:

Table 3: Market Shares for Home Purchase Loans in Selected Submarkets, 
1996-2005:

Table 4: Market Shares for Home Purchase and Refinance Loans, 1996- 
2005:

Table 5: Market Shares for Refinance Loans, 1996-2005:

Table 6: Selected FHA Borrower and Loan Characteristics, 1996-2005:

Table 7: Selected Prime Borrower and Loan Characteristics, 1996-2005:

Table 8: Selected Subprime Borrower and Loan Characteristics, 1996- 
2005:

Figures:

Figure 1: FHA and Other Market Participants' Shares of the Home 
Purchase Mortgage Market, 1996-2005:

Figure 2: FHA, Prime, Subprime, and GSE Shares of the Minority 
Submarket for Home Purchase Mortgages, 1996-2005:

Figure 3: FHA, Prime, Subprime, and GSE Shares of the Lower-Income 
Submarket for Home Purchase Mortgages, 1996-2005:

Figure 4: Changes in Market Shares for FHA-Insured, Prime, and Subprime 
Loans in Census Tracts with Different Race and Income Characteristics, 
1996 through 2005:

Figure 5: FHA's Market Share in Census Tract Groupings with Different 
Median Credit Scores, 1996-2005:

Abbreviations:

APR: Annual Percentage Rate:

ARM: adjustable rate mortgage:

FFIEC: Federal Financial Institutions Examination Council:

FHA: Federal Housing Administration:

GSE: government-sponsored enterprises:

HMDA: Home Mortgage Disclosure Act:

HUD: Department of Housing and Urban Development:

MBA: Mortgage Bankers Association:

OFHEO: Office of Federal Housing Enterprise Oversight:

RHS: Rural Housing Service:

SFDW: Single-Family Data Warehouse:

TOTAL: Technology Open to Approved Lenders:

VA: Veterans Administration:

United States Government Accountability Office:

Washington, DC 20548:

June 29, 2007:

The Honorable Richard Shelby: 
Ranking Member, 
Committee on Banking, Housing, and Urban Affairs: 
United States Senate:

The Honorable Wayne Allard: 
United States Senate: 

Through its single-family mortgage insurance programs, the Department 
of Housing and Urban Development's (HUD) Federal Housing Administration 
(FHA) insures private lenders against losses from defaults on mortgages 
that meet FHA criteria. FHA historically has been an important 
participant in the market for home purchase mortgages, which grew from 
3.1 million loans in 1996 to 4.7 million loans in 2005.[Footnote 1] FHA 
in the past has played a particularly large role among minority, lower- 
income, and first-time homebuyers and generally is thought to promote 
stability in the market by helping to ensure the availability of 
mortgage credit in areas that may be underserved by the private sector 
during economic downturns. However, demand for FHA-insured mortgages 
has dropped sharply in recent years, raising questions about the 
agency's role in and ability to adapt to a changing mortgage market. To 
help FHA adapt to market changes, in 2006 HUD submitted a legislative 
proposal to Congress that, among other things, would raise FHA's loan 
limits, give the agency flexibility to set insurance premiums based on 
the credit risk of borrowers, and reduce down-payment requirements from 
the current 3 percent to potentially zero. Our analysis of the major 
elements of this proposal are contained in a companion report that we 
are issuing today.[Footnote 2]

The different parts of the mortgage market are defined by the types of 
mortgage institutions that serve them and the credit quality of the 
borrowers. The conventional market, comprising mortgages that do not 
carry government insurance or guarantees, has prime and subprime 
segments.[Footnote 3] Prime borrowers typically have strong credit 
scores and obtain the most competitive interest rates and mortgage 
terms.[Footnote 4] In contrast, subprime borrowers typically have 
blemished credit and lower credit scores, may have difficulty providing 
income documentation, and generally pay higher interest rates and fees 
than prime borrowers. Mortgages purchased by two government-sponsored 
enterprises (GSE), Fannie Mae and Freddie Mac, comprise another, albeit 
overlapping, market segment. The GSEs purchase (primarily conventional 
prime) loans and pool them to create securities sold to investors. The 
GSEs have goals directed at financing housing for lower-income families 
and in underserved areas. FHA is a major part of the market segment 
comprising loans with government insurance or guarantees, which 
primarily serves borrowers who would have difficulty obtaining 
conventional prime mortgages.[Footnote 5] The borrowers are allowed to 
make very low down payments and generally pay interest rates that are 
competitive with prime mortgages but also pay fees or premiums to cover 
the cost of the guaranty.

To provide insights into FHA's role in the mortgage market, this report 
discusses (1) trends in FHA's share of the market for home purchase 
mortgages and selected submarkets from 1996 through 2005, and how they 
compared with the trends for the prime, subprime, and GSE market 
segments; and (2) the major factors associated with the trends in FHA's 
market share and the implications of these trends for homebuyers and 
FHA.[Footnote 6] In addition, appendix III of this report provides 
information on selected borrower and loan characteristics of FHA 
mortgages and mortgages in the prime and subprime market segments.

To analyze trends in the overall market for home purchase mortgages, we 
compiled and analyzed loan data for 1996 through 2005 collected under 
the Home Mortgage Disclosure Act (HMDA). HMDA requires lending 
institutions to collect and publicly disclose information about housing 
loans and applications for such loans. HMDA data capture about 80 
percent of the mortgage loans funded each year, according to estimates 
by the Board of Governors of the Federal Reserve System (Federal 
Reserve), and are one of the most comprehensive sources of information 
on mortgage lending. HMDA data have a number of limitations that 
affected our analysis. More specifically, the data (1) understate the 
number of loans purchased by the GSEs, (2) do not include a precise 
indicator for subprime loans, and (3) do not distinguish first 
mortgages from "piggyback" loans (i.e., the junior lien in a pair of 
loans used to finance the same property) for most of the period we 
examined. While we acknowledge these limitations, we used HMDA data to 
evaluate long-term market share trends rather than to provide precise 
annual figures for each market segment, including the GSE segment. 
According to Freddie Mac, Fannie Mae, and Federal Reserve officials, 
our use of HMDA data was appropriate for this purpose. We identified 
subprime loans by merging the data with a HUD-maintained list of 
lenders that specialize in subprime lending. We identified piggyback 
loans using a data matching process based on an algorithm developed by 
the Federal Reserve and excluded these loans from our analysis. To 
analyze trends in various submarkets, we incorporated additional data 
from FHA, the Census Bureau, the Office of Federal Housing Enterprise 
Oversight, and TransUnion.[Footnote 7] To determine the factors 
associated with the trends in FHA's market share and the potential 
implications of these trends, we analyzed HMDA data, information from 
HUD's Single-Family Data Warehouse (SFDW), the Mortgage Bankers 
Association's (MBA) National Delinquency Survey, and summary statistics 
provided by FHA and contained in prior studies from databases 
maintained by LoanPerformance.[Footnote 8] We also reviewed literature, 
analyzed agency documents, and interviewed FHA officials, mortgage 
industry participants, and academic researchers. To determine borrower 
and loan characteristics for different market segments, we analyzed 
HMDA data, information from SFDW and the Federal Housing Finance Board, 
and summary LoanPerformance data. Appendix I contains additional 
information on our scope and methodology. We conducted our work in 
Washington, D.C., from September 2006 through May 2007 in accordance 
with generally accepted government auditing standards.

Results in Brief:

FHA's share of the market for home purchase mortgages declined 
substantially from 1996 through 2005, most significantly among minority 
borrowers who accounted for a growing share of subprime loans in that 
period. More specifically, FHA's market share in terms of numbers of 
loans fell from 19 percent in 1996 to 6 percent in 2005, with almost 
all of the decline occurring since 2001. In contrast,

* the market share for prime loans was relatively stable over the 10- 
year period, growing from 73 to 76 percent;

* the market share for subprime loans grew nearly every year, rising 
from 2 percent to 15 percent overall, with particularly large increases 
since 2001; and:

* the market share of the housing GSEs--essentially a subset of the 
prime market--rose 3 percentage points overall (to roughly 30 percent 
in 2005), with nearly all of the growth occurring before 2002.

During the 10-year period, the same general pattern of declining market 
share for FHA and increasing market share for conventional loans held 
true in submarkets where FHA traditionally has played a major role. For 
example, among minorities, FHA's market share fell 25 percentage points 
(from 32 to 7 percent), while conventional prime and subprime shares 
rose 6 and 24 percentage points, respectively. The drop in FHA's market 
share was particularly large--35 percentage points--among Hispanic 
borrowers. Among lower-income (i.e., low-and moderate-income) 
borrowers, FHA's market share fell 16 percentage points (from 26 to 10 
percent), while the prime and subprime shares grew 7 and 14 percentage 
points, respectively.[Footnote 9] Consistent with these trends, in 
geographic areas with higher proportions of minority and lower-income 
borrowers, FHA lost substantial market share while subprime lending 
grew dramatically. The same pattern was also evident in areas with 
relatively low median credit scores and where median home prices rose 
to at least 75 percent of FHA's loan limit during the 10-year period.

The decline in FHA's market share was associated with several factors 
and has been accompanied by higher ultimate costs for certain 
conventional borrowers and a worsening in indicators of credit risk 
among FHA borrowers. More specifically, (1) FHA's product restrictions 
and lack of process improvements relative to the conventional market 
and (2) product innovations and expanded loan origination and funding 
channels in the conventional market--coupled with interest rate and 
house price changes--provided conditions that favored conventional 
mortgages over FHA products. For example, mortgage industry officials 
with whom we spoke cited FHA's administrative requirements and loan 
limits as factors that limited the attractiveness of FHA-insured 
mortgages. Additionally, historically low interest rates and rising 
house prices increased demand for loan products offered by the 
conventional market (especially subprime lenders), which featured 
flexible payment and interest options that allowed borrowers to qualify 
for mortgages despite the appreciations in home values. Most subprime 
borrowers opted for adjustable rate products (in 2005, more than 75 
percent of subprime loans were adjustable rate), having been attracted 
by their "affordability" features, such as lower initial payments and 
interest rates. In contrast to FHA-insured loans, the majority of 
subprime loans had higher ultimate costs, in part because their initial 
interest rates could increase 3 percentage points in as little as 2 
years and two-thirds featured prepayment penalties, which can deter 
borrowers from refinancing into lower-cost products. Subprime loans 
also have experienced relatively high rates of default and foreclosure, 
adding to concerns about their long-term cost to borrowers. Certain 
factors associated with the decline in FHA's market share also have 
negatively affected the financial performance of FHA's insurance 
program. More specifically, as conventional lenders expanded their 
presence in traditional FHA submarkets through the development of new 
products and use of automated underwriting tools, FHA experienced 
adverse selection--that is, conventional providers identified and 
approved relatively lower-risk borrowers, leaving relatively higher- 
risk borrowers for FHA.

While our report does not make recommendations, we make observations 
about how developments in the different segments of the mortgage market 
could affect FHA's market share in the future. The relatively poor 
performance of subprime mortgages in recent months and a contraction of 
this market segment could shift market share to FHA. But the size of 
this shift depends partly on the efforts of conventional mortgage 
providers, including the GSEs, to offer viable alternatives to subprime 
borrowers. Notwithstanding the actions of conventional providers, FHA 
could be a vehicle to provide lower-priced and more sustainable 
mortgage options for some borrowers who are considering or struggling 
to maintain higher-priced subprime loans. However, careful assessment 
and management of the risks associated with serving these borrowers 
would be necessary to avoid exacerbating problems in the financial 
performance of FHA's insurance program.

We provided HUD with a draft of this report. HUD commented that we 
produced a straightforward, well-researched report on the reasons for 
the recent decline in FHA's market share. HUD also noted that 
additional product and pricing flexibility would help FHA to continue 
serving lower-income and minority households. We discuss HUD's comments 
in the agency comments section, and reproduced its written comments in 
appendix IV.

Background:

Congress established FHA in 1934 under the National Housing Act (P.L. 
73-479) to broaden homeownership, protect and sustain lending 
institutions, and stimulate employment in the building industry. Over 
time, FHA came to play a major role in extending mortgage credit to 
first-time homebuyers and historically underserved borrowers such as 
minority and lower-income families. For example, in 2005, slightly less 
than 80 percent of FHA borrowers were first-time homebuyers, more than 
80 percent had lower incomes, and approximately 30 percent were 
minorities. (See app. III for additional information on the borrower 
and loan characteristics of FHA-insured, prime, and subprime 
mortgages.) FHA currently insures a variety of mortgages for home 
purchases, construction and rehabilitation, and refinancing, with its 
most popular program--Section 203(b)--offering 15-and 30-year mortgages 
for single-family dwellings.

Generally, borrowers are required to purchase mortgage insurance when 
the loan-to-value (LTV) ratio (the amount of the mortgage loan divided 
by the value of the home) exceeds 80 percent. FHA is a government 
mortgage insurer in a market that also includes private insurers. 
Private mortgage insurance policies provide lenders coverage on a 
portion (generally 20 to 30 percent) of the mortgage balance. However, 
borrowers who have difficulty meeting down-payment and credit score 
requirements for conventional loans may find it easier to qualify for a 
loan with FHA insurance, which covers 100 percent of the value of the 
loan. FHA-insured borrowers are required to make minimum cash 
investments of 3 percent, which may come from the borrowers' own funds 
or from certain third-party sources. Borrowers are permitted to finance 
their mortgage insurance premiums and some closing costs, which can 
create an effective LTV ratio of close to 100 percent for some FHA- 
insured loans. In fiscal year 2006, the agency insured almost 426,000 
mortgages, representing about $55 billion in mortgage insurance.

Congress has set limits on the size of the loans that may be insured by 
FHA. The limit for an FHA-insured mortgage is 95 percent of the local 
median home price, not to exceed 87 percent or fall below 48 percent of 
the Freddie Mac conforming loan limit, which was $417,000 in 2006. 
Therefore, in 2006, FHA loan limits fell between a floor in low-cost 
areas of $200,160 and a ceiling in high-cost areas of $362,790. Eighty- 
two percent of counties nationwide had loan limits set at the low-cost 
floor, while 3 percent had limits set at the high-cost ceiling. The 
remaining 15 percent of counties had limits set between the floor and 
ceiling, based on local median house prices.

FHA determines the expected cost of its insurance program, known as the 
credit subsidy cost, by estimating the program's future 
performance.[Footnote 10] FHA's mortgage insurance program is currently 
a negative subsidy program, meaning that the present value of estimated 
cash inflows to FHA's Mutual Mortgage Insurance Fund (Fund) exceeds the 
present value of estimated cash outflows. The economic value, or net 
worth, of the Fund depends on the relative size of cash outflows and 
inflows over time. Cash flows out of the Fund for payments associated 
with claims on defaulted loans and refunds of up-front premiums on 
prepaid mortgages. To cover these outflows, FHA receives cash inflows 
from borrowers' insurance premiums and net proceeds from recoveries on 
defaulted loans. If the Fund were to be exhausted, the U.S. Treasury 
would have to cover lenders' claims directly.

A number of different private-sector and government institutions 
participate in the mortgage market. Along with FHA, the Department of 
Veterans Affairs' (VA) Loan Guaranty Service and the Department of 
Agriculture's Rural Housing Service (RHS) administer federal government 
programs that insure or guarantee single-family mortgages made by 
private lenders. Private lenders that loan borrowers funds for home 
purchase and refinance mortgages often work with mortgage brokers, 
independent contractors that originate the loan products of multiple 
lenders.[Footnote 11] Fannie Mae and Freddie Mac are housing GSEs that 
purchase primarily prime conventional mortgages from lenders across the 
country, financing their purchases through borrowing or by issuing 
securities backed by the mortgages. Since 1994, HUD has set affordable 
housing goals for the housing GSEs and has adjusted the goals upward 
every few years. One goal is that at least 55 percent of the mortgages 
purchased by the GSEs must be made to families whose incomes are no 
greater than the area median income. The other two major goals concern 
the percentage of mortgages to borrowers residing in lower-income 
communities and certain high-minority neighborhoods (38 percent) and 
the percentage of borrowers with very low incomes and those with low 
incomes who live in low-income areas (25 percent).[Footnote 12]

FHA's Market Share Declined from 1996 through 2005, While the 
Conventional Market Share Increased, Especially among Minority and 
Lower-Income Borrowers:

FHA's share of the market for home purchase mortgages in terms of 
numbers of loans declined 13 percentage points from 1996 through 2005, 
while the prime share increased slightly and the subprime share grew 13 
percentage points. Although the decline in FHA's market share was broad-
based, FHA experienced particularly sharp decreases in submarkets where 
it traditionally has had a strong presence, such as among minority and 
lower-income borrowers. Consistent with these trends, in geographic 
areas with higher concentrations of these borrowers, FHA lost 
substantial market share while the subprime share grew dramatically. 
The same pattern held true in areas with relatively low median credit 
scores and where median home prices rose to at least 75 percent of 
FHA's loan limit during the 10-year period.

FHA's Market Share Decreased While Conventional Market Share, 
Particularly for Subprime Loans, Grew:

From 1996 through 2005, FHA's share of the home purchase mortgage 
market declined while the conventional share increased.[Footnote 13] As 
shown in figure 1, FHA's market share fell from almost 19 percent 
(about 583,000 loans) in 1996 to about 6 percent (about 295,000 loans) 
in 2005, with almost all of the decline occurring after 2001.[Footnote 
14] Although FHA's market share has fluctuated over time, during the 
past two decades it has generally been over 10 percent.

Figure 1: FHA and Other Market Participants' Shares of the Home 
Purchase Mortgage Market, 1996-2005:

[See PDF for image]

Source: GAO analysis of HMDA data.

Note: We calculated market shares based on numbers of loans and, to the 
extent possible, excluded piggyback loans. Data for the GSEs do not 
include loans originated and purchased in different years or all of the 
loans sold to intermediaries before being purchased by the GSEs.

[End of figure]

Over the 10-year period, the market share for conventional mortgages 
rose from almost 75 percent (about 2.3 million loans in 1996) to about 
91 percent (about 4.2 million loans in 2005), with much of the increase 
due to growth in subprime lending. More specifically, prime market 
share increased from 73 percent to 76 percent overall, falling somewhat 
from 1996 through 2000 but then increasing about 5 percentage points 
after 2000. Subprime market share increased substantially over the 10- 
year period, from 2 percent to 15 percent, with most of the increase 
occurring after 2001 (growing from 5 percent in 2001 to 15 percent in 
2005). From 1996 through 2005, the market share for the GSEs 
(essentially a subset of the conventional prime market) increased 3 
percentage points overall (to roughly 30 percent in 2005), growing 
about 13 percentage points from 1996 through 2002 but falling 9 
percentage points thereafter.

Especially among Black, Hispanic, and Lower-Income Borrowers, FHA's 
Market Share Declined Sharply and the Subprime Share Increased:

From 1996 through 2005, FHA lost market share in certain key 
submarkets, especially among minority and lower-income borrowers, as 
well as among borrowers with mortgages within FHA's loan limits. At the 
same time, the market share for conventional mortgages, particularly 
subprime loans, grew in these submarkets. This trend also held true in 
census tracts with high concentrations of low-income and minority 
households, relatively low median credit scores, and median home prices 
within FHA's loan limits. Mirroring the trend in the overall home 
purchase mortgage market, FHA's loss of market share in these 
submarkets primarily occurred after 2001. (See app. II for details on 
the trends in specific submarkets for each market segment):

Racial Submarkets:

FHA traditionally has played a major role among minority borrowers. 
However, over the 10-year period, FHA's share of this submarket fell 
substantially. Specifically, as shown in figure 2, FHA's market share 
dropped 25 percentage points (from 32 to 7 percent) among minority 
borrowers, but declined most sharply among black and Hispanic borrowers 
(by 27 and 35 percentage points, respectively). FHA's market share 
among white borrowers decreased from 16 percent to 7 percent during the 
10-year period.

Figure 2: FHA, Prime, Subprime, and GSE Shares of the Minority 
Submarket for Home Purchase Mortgages, 1996-2005:

[See PDF for image]

Source: GAO analysis of HMDA data.

Note: We calculated market shares based on numbers of loans and, to the 
extent possible, excluded piggyback loans. Data for the GSEs do not 
include loans originated and purchased in different years or all of the 
loans sold to intermediaries before being purchased by the GSEs.

[End of figure]

In contrast to FHA, prime market share increased about 6 percentage 
points (from 59 to 65 percent) among minority borrowers and 5 
percentage points (from almost 77 to just over 81 percent) among white 
borrowers from 1996 through 2005. Over the same period, subprime market 
share increased 24 percentage points (from 2 to 26 percent) among 
minorities, but especially among black and Hispanic borrowers (29 
percentage points for each group). Subprime market share among white 
borrowers increased from 1 to 9 percent from 1996 through 2005. GSE 
market share among minority borrowers ultimately did not change 
substantially, beginning and ending the period at roughly 20 percent. 
From 1996 through 2002, GSE market share among minority borrowers 
increased 11 percentage points (to roughly 32 percent), but fell by 
about the same amount thereafter. GSE market share among white 
borrowers increased 7 percentage points over the 10-year period, to 
roughly 35 percent in 2005.

Income Submarkets:

Lower-income (i.e., low-and moderate-income) borrowers historically 
have relied heavily on FHA products, but FHA's market share dropped in 
this submarket as well.[Footnote 15] From 1996 through 2005, FHA's 
market share decreased among borrowers of all income levels, but, as 
shown in figure 3, particularly among lower-income borrowers, where 
FHA's share declined 16 percentage points (from 26 percent to 10 
percent). From 1996 through 2005, FHA's market share among upper-income 
borrowers fell from 9 to 2 percent.

Figure 3: FHA, Prime, Subprime, and GSE Shares of the Lower-Income 
Submarket for Home Purchase Mortgages, 1996-2005:

[See PDF for image]

Source: GAO analysis of HMDA data.

Note: We calculated market shares based on numbers of loans and, to the 
extent possible, excluded piggyback loans. Data for the GSEs do not 
include loans originated and purchased in different years or all of the 
loans sold to intermediaries before being purchased by the GSEs.

[End of figure]

Over the 10-year period, prime market share increased from 65 to 72 
percent among lower-income borrowers and remained consistently high 
(above 80 percent) among upper-income borrowers. At the same time, 
subprime market share increased 14 percentage points (from 1 to 15 
percent) among lower-income borrowers and 12 percentage points (from 2 
to 14 percent) among upper-income borrowers. GSE market share increased 
8 percentage points among lower-income borrowers (to roughly 32 percent 
in 2005), and remained at approximately 30 percent for upper-income 
borrowers.

FHA-Eligible Submarket:

As previously noted, Congress has set limits on the size of FHA-insured 
loans. Although loans that fall within these limits comprise what has 
been called the FHA-eligible submarket, from 1996 through 2005 FHA's 
share in this submarket declined more sharply than in the overall home 
purchase mortgage market. Specifically, it decreased 16 percentage 
points (from 25 to 9 percent), with a steep decline occurring after 
2001 when its market share was 24 percent. FHA's market share among 
minority borrowers in this submarket also fell dramatically (from 39 
percent in 1996 to 10 percent in 2005), as did its share of loans to 
lower-income borrowers (from 28 percent in 1996 to 11 percent in 2005).

While FHA's market share declined in the FHA-eligible submarket, the 
prime and subprime market shares grew. Overall, the prime share in this 
submarket increased modestly (from 67 percent to 73 percent) from 1996 
to 2005. In contrast, the subprime share increased 14 percentage points 
(from 1 percent to 15 percent). The GSE share in this submarket 
increased 15 percentage points from 1996 to 2002 (to roughly 40 
percent) but fell to about 33 percent as of 2005.

Census Tracts Groupings Characterized by Population Characteristics and 
House Prices:

To further analyze mortgage market trends, we examined FHA, prime, and 
subprime market shares in various census tract groupings.[Footnote 16] 
Specifically, we looked at census tracts grouped based on (1) race and 
income characteristics, (2) median credit score, and (3) median home 
price in relation to FHA loan limits. For the credit score analysis, we 
limited our analysis to census tracts where FHA's market share averaged 
at least 5 percent from 1996 through 1998 (representing about 75 
percent of the census tracts nationwide).[Footnote 17]

From 1996 through 2005, FHA lost market share in approximately 90 
percent of the census tracts we included in our analysis. As shown in 
figure 4, the losses occurred primarily in census tracts with both 
medium to high concentrations of minorities and low to moderate median 
incomes.[Footnote 18] At the same time, the market share for 
conventional loans increased for this group of census tracts, 
especially for subprime loans. This was particularly evident in census 
tracts with both the highest concentrations of minorities and low 
median incomes, where FHA's market share fell 31 percentage points and 
subprime market share increased 28 percentage points.

Figure 4: Changes in Market Shares for FHA-Insured, Prime, and Subprime 
Loans in Census Tracts with Different Race and Income Characteristics, 
1996 through 2005:

[See PDF for image]

Source: GAO analysis of HMDA data.

Note: We calculated market shares based on numbers of loans and, to the 
extent possible, excluded piggyback loans.

[End of figure]

From 1996 through 2005, FHA's market share declined in all of the 
census tract groupings we defined based on the median credit score of 
mortgage borrowers. However, FHA's share declined most sharply in 
census tracts with relatively low median credit scores.[Footnote 19] 
Specifically, FHA's market share dropped 26 percentage points (from 
about 37 percent in 1996 to 11 percent in 2005) in census tracts with 
median credit scores in the bottom quarter of the credit score 
distribution for all census tracts included in our analysis, with the 
steepest decline occurring after 2001 (see fig. 5). At the same time, 
the prime and subprime market shares in these census tracts increased. 
More specifically, the prime share increased 12 percentage points (from 
about 51 percent in 1996 to 63 percent in 2005), and the subprime share 
increased 21 percentage points (from about 2 percent in 1996 to 23 
percent in 2005). In census tracts with median credit scores between 
the bottom quarter and the top quarter of the distribution, FHA's 
market share fell 16 percentage points over the 10-year period, while 
the prime and subprime shares rose 10 and 12 percentage points, 
respectively. Finally, in census tracts with median credit scores in 
the top quarter of the distribution, FHA's market share decreased 12 
percentage points, while the prime and subprime shares increased 9 and 
7 percentage points, respectively.

Figure 5: FHA's Market Share in Census Tract Groupings with Different 
Median Credit Scores, 1996-2005:

[See PDF for image]

Source: GAO analysis of HMDA and TransUnion data.

Note: We limited our analysis to census tracts where FHA's market share 
averaged at least 5 percent from 1996 through 1998. We calculated 
market shares based on numbers of loans and, to the extent possible, 
excluded piggyback loans. The credit score information is from 
TransUnion and represents the median credit score of mortgage borrowers 
in each census tract as of December 31, 2004.

[End of figure]

From 1996 through 2005, FHA lost market share in census tracts where 
median home prices were above and below FHA's loan limits (which FHA 
adjusts annually within statutory caps), but experienced the greatest 
losses in census tracts where median home prices appreciated to at 
least 75 percent of FHA's loan limit during the 10-year period. In 
census tracts where the median home price was less than 75 percent of 
the FHA loan limit each year, FHA's market share dropped 24 percentage 
points (from 36 percent in 1996 to 12 percent in 2005). In census 
tracts where the median home price was at least 75 percent but less 
than 125 percent of the FHA loan limit each year, FHA's market share 
fell more modestly--13 percentage points (from 18 percent in 1996 to 5 
percent in 2005). However, FHA lost almost all of its market share in 
areas where the median home price was less than 75 percent of the FHA 
loan limit early in the 10-year period but grew to at least 75 percent 
of the loan limit later in the period. Specifically, FHA's market share 
in these areas fell 38 percentage points--from 41 percent in 1996 to 3 
percent in 2005.

At the same time, conventional market share grew in the census tract 
groupings we examined. For example, in census tracts where median home 
prices were less than 75 percent of FHA's loan limit each year, the 
prime share increased 11 percentage points (from 53 percent in 1996 to 
64 percent in 2005) and the subprime share increased 18 percentage 
points (from 2 percent in 1996 to 20 percent in 2005). The prime and 
subprime market shares increased even more in census tracts where 
median home prices rose from less than 75 percent of the FHA loan limit 
to at least 75 percent of the limit during the 10-year period. 
Specifically, prime and subprime shares increased 22 and 25 percentage 
points, respectively.

The Decline in FHA's Market Share Was Associated with Several Factors 
and Has Been Accompanied by Higher Costs for Certain Conventional 
Borrowers and Increased Credit Risk for FHA:

During the period from 1996 through 2005, a combination of factors 
created conditions that favored conventional mortgages over FHA 
products. These factors included (1) FHA's product restrictions and 
lack of process improvements relative to the conventional market and 
(2) product innovations and expanded loan origination and funding 
channels in the conventional market. Most subprime mortgages, which 
grew in popularity as FHA's market share declined, had higher ultimate 
costs, in part because their initial interest rates could reset to 
higher rates. In addition, subprime mortgages performed worse than 
prime and FHA-insured loans. As FHA's market share fell, certain 
factors associated with this decline also contributed to a worsening in 
indicators of credit risk among FHA borrowers.

FHA's Process Inefficiencies and Product Restrictions Have Been Linked 
to the Decline in Use of FHA-Insured Mortgages:

Lenders, mortgage industry groups, and consumer advocacy groups have 
cited FHA administrative requirements as a factor that contributed to 
the decline in the agency's market share over the 10-year period we 
examined. According to mortgage industry officials we interviewed, 
processing FHA-insured loans was more time consuming, labor intensive, 
and costly than processing conventional mortgages. For example, instead 
of having lenders submit all loan information electronically, FHA 
required lenders to send loan case files to FHA for review before the 
loans could be approved for insurance. If the review found a problem 
with the case file, FHA would mail the file back to the lender, who in 
turn would make the needed corrections and mail the file back to FHA. 
Additionally, in contrast to conventional market requirements, FHA's 
appraisal process required that minor property repairs, such as cracked 
window panes, be corrected prior to loan closing. According to the MBA, 
some FHA lenders have reported substantially higher processing times 
and origination costs for FHA-insured loans than for conventional 
loans. In contrast with FHA, conventional loan processing became 
increasingly streamlined and less costly through the use of information 
technology and the Internet. According to mortgage industry officials 
with whom we spoke, FHA's more cumbersome processes made FHA's products 
less attractive than conventional products, particularly in competitive 
housing markets where it is important to be able to close on a home 
quickly.

However, in 2006, FHA made several administrative changes, such as 
allowing higher-performing lenders to approve FHA insurance without a 
prior review by FHA and simplifying its appraisal process. FHA and 
mortgage industry officials with whom we spoke said that these changes 
have increased the efficiency of loan and insurance processing, making 
FHA products more attractive and, therefore, more likely to be 
used.[Footnote 20]

FHA and mortgage industry officials with whom we spoke also cited FHA's 
loan limits as a factor that contributed to the decline in FHA's market 
share. In some areas of the country, particularly in parts of 
California and the Northeast, median home prices have been 
substantially higher than FHA's maximum loan limits, reducing the 
agency's ability to serve borrowers in those markets. For example, the 
2005 loan limit in high-cost areas was $312,895 for one-unit 
properties, while the median home price was about $399,000 in Boston, 
Massachusetts; about $432,000 in Newark, New Jersey; $500,000 in 
Salinas, California; and about $646,000 in San Francisco, California.

Some mortgage industry officials also pointed to other product 
restrictions as a reason why FHA loans have been less competitive than 
conventional loans. Many borrowers either cannot or do not want to make 
a down payment, and in recent years members of the conventional 
mortgage market (such as private mortgage insurers, the housing GSEs, 
and large private lenders) have been increasingly active in supporting 
low and no-down-payment mortgages. For example, the GSEs introduced no- 
down-payment mortgage products in 2000. In contrast, FHA does not offer 
a zero-down-payment product, which some lenders and industry observers 
have cited as a major factor underlying the decline in FHA's market 
share. (However, as previously noted, FHA allows borrowers to finance 
their up-front insurance premium and some closing costs; as a result, 
an FHA-insured loan could equal nearly 100 percent of the property's 
value or sales price.)

Developments in Conventional Market Products and Processes Occurred as 
FHA's Market Share Declined:

During the 10-year period we examined, several developments associated 
with FHA's declining market share occurred in the conventional market. 
First, the conventional market offered products that increased consumer 
choices for borrowers, including those who may have previously chosen 
an FHA-insured loan. These products, in combination with historically 
low interest rates, made it easier for homebuyers to purchase homes in 
a period of strong house price appreciation. For example, to serve the 
lower-income and minority populations targeted by their affordable 
housing goals, the GSEs developed products featuring underwriting 
criteria that allowed for higher risks, such as Freddie Mac's Home 
Possible® Mortgage, which allows qualified borrowers to make no down 
payment. As the GSEs worked to meet their goals, their market share 
among lower-income and minority borrowers grew over much of the 10-year 
period we examined, while FHA's fell. More specifically, the GSE market 
share among lower-income borrowers grew nearly 14 percentage points 
from 1996 through 2002, while FHA's share dropped 3 percentage points 
over that period. During the same time frame, GSE market share among 
minority borrowers grew 11 percentage points, while FHA's fell 8 
percentage points. Consistent with these observations, research by An 
and Bostic (2006) found a significant negative relationship between the 
change in the GSE and FHA shares of the overall mortgage market from 
1996 through 2000.[Footnote 21] However, as previously noted, the 
market shares for both FHA and the GSEs ultimately declined after 2002.

Other products offered by conventional mortgage providers--interest- 
only loans, no-and low-documentation mortgages, piggyback loans, and 
hybrid adjustable rate mortgages (ARM)--also became popular, especially 
during the subprime market's rapid growth after 2001, because they 
featured flexible payment and interest options that increased initial 
affordability.[Footnote 22] For example, borrowers were attracted to 
hybrid ARMs because they could qualify on the basis of an interest rate 
at or near the initial rate rather than the higher reset rate. These 
nontraditional products came to represent a sizeable part of the 
subprime market after 2001. For example, according to data reported by 
an investment bank, from the first quarter of 2002 to the third quarter 
of 2005, the percentage of subprime mortgages that were interest-only 
loans increased from zero to 29 percent and the percentage that were no-
and low-documentation loans increased from 30 to 41 percent. Over the 
same period, the proportion of subprime mortgages with piggyback loans, 
which are often used to avoid the need for mortgage insurance, 
increased from 2 to 33 percent.[Footnote 23] Additionally, from 2002 
through 2005, the percentage of subprime mortgages that were ARMs grew 
from 68 to 73 percent, with hybrid ARMs accounting for the majority of 
these loans.[Footnote 24] In contrast, FHA (which, as previously 
discussed, lost substantial market share in submarkets where subprime 
lending grew dramatically) does not offer interest-only or no-and low- 
documentation products and did not begin insuring hybrid ARMs until 
2004.

A second development in the conventional market was advances in 
underwriting technology that allowed conventional mortgage providers to 
process loan applications more quickly and consistently than in the 
past and broaden their customer base. For example, to help assess the 
default risk of borrowers, the mortgage industry increasingly used 
mortgage scoring and automated underwriting systems. Mortgage scoring 
is a technology-based tool that relies on the statistical analysis of 
millions of previously originated mortgage loans to determine how key 
attributes such as the borrower's credit history, property 
characteristics, and terms of the mortgage affect future loan 
performance. FHA implemented its own mortgage scoring tool, called the 
Technology Open to Approved Lenders (TOTAL) scorecard, in 2004. 
However, in prior work we found that the way FHA developed TOTAL may 
limit the scorecard's effectiveness.[Footnote 25] To the extent that 
conventional mortgage providers were better able than FHA to use 
scoring tools, lower-risk borrowers in FHA's traditional market segment 
may have migrated toward conventional products, contributing to the 
decline in FHA's market share.

A third development was an increase in mortgage originations through 
third parties such as loan correspondents and mortgage brokers, 
particularly in the subprime market.[Footnote 26] This trend has been 
associated with the decline in FHA's market share because these 
mortgage originators primarily market non-FHA products. According to 
data reported by the trade publication Inside B&C Lending, loan 
correspondents and mortgage brokers increased their share of subprime 
loan originations from 66 percent in 2003 to 81 percent in 2005. In 
contrast, just 27 percent of FHA-insured mortgages in 2005 were 
originated by loan correspondents and mortgage brokers. According to 
the National Association of Mortgage Brokers, many mortgage brokers do 
not offer FHA products because they find the financial and audit 
requirements for participation in FHA programs cost- 
prohibitive.[Footnote 27]

A fourth development in the conventional market was the growth in 
private mortgage securitization (the bundling of mortgage loans into 
bond-like securities that can be bought and sold on the secondary 
market), particularly for subprime loans. Securitization allowed 
lenders to sell loans from their portfolios, transferring credit risk 
to investors, and use the proceeds to make more loans. According to 
recent testimony by a senior official from the Federal Deposit 
Insurance Corporation, many lenders would not have found subprime 
mortgages attractive absent the funding and credit-risk transfer 
features available through securitization.[Footnote 28] At the same 
time, these securities were attractive to different types of investors. 
The combination of higher interest rates and higher risks for subprime 
loans facilitated the division of mortgage securities into risk 
tranches, which offer investors different risk and reward options. 
According to data reported by Inside B&C Lending, from 1999 through 
2005, subprime securitization rates--that is, the dollar amount of 
securitized loans divided by the dollar amount of loan originations-- 
rose from less than 40 percent to about 80 percent. In addition, the 
dollar volume of subprime loan securitizations increased from $61 
billion in 1999 to nearly $508 billion in 2005.

As FHA Lost Market Share, Many Subprime Borrowers Obtained Loans with 
High Ultimate Costs and Credit Characteristics among FHA Borrowers 
Worsened:

As a result of developments in the conventional market, including lower 
interest rates, more homebuyers--especially minority and lower-income 
families--were able to obtain conventional loans, but many of these 
loans had high ultimate costs. As previously discussed, much of the 
increase in mortgages to minorities and lower-income borrowers was due 
to the growth in subprime lending, and many of these loans offered 
lower initial costs through their interest-only features and low 
introductory interest rates. However, these mortgages became more 
costly as the interest rates on many of these loans reset to higher 
rates, typically 2 to 3 percentage points higher in a relatively short 
time period. A common subprime mortgage product is a 2/28 hybrid ARM, 
which features a fixed interest rate for 2 years, followed by a series 
of resets up to a fully indexed adjustable rate for the remaining 28 
years of the loan.[Footnote 29] Consider the example of a borrower who 
took out a $166,000 2/28 loan in 2003 with an initial interest rate of 
7.5 percent and a first interest rate reset of 2.5 percentage points. 
During the first 2 years of the loan, the borrower's monthly payment 
was $1,161. But after the first interest rate reset, the borrower's 
monthly payment grew to $1,446, a $285 or 25 percent increase.[Footnote 
30] Additional resets up to the fully indexed interest rate--which can 
be as much as 6 percentage points higher than the initial interest 
rate--would push the borrower's payments even higher. In contrast to 
the subprime market, the large majority of FHA-insured loans are fixed- 
rate mortgages. For example, fixed-rate loans accounted for 92 percent 
of FHA-insured mortgages made in 2005. Additionally, for FHA-insured 
hybrid ARMs, the allowable interest rate adjustments after the initial 
fixed-rate period are comparatively lower--1 percentage point for 3- 
year ARMs and 2 percentage points for 5-, 7-, and 10-year 
ARMs.[Footnote 31]

Reflecting in part the generally lower credit scores of subprime 
borrowers, subprime mortgages are more likely than prime or FHA loans 
to be what the Federal Reserve has designated "high-priced" loans. HMDA 
data for the 2 most recent years available (2004 and 2005) include an 
indicator for such loans. This indicator is based on a loan's annual 
percentage rate (APR), which represents the cost of credit to the 
consumer by capturing the contract interest rate on a loan, the points 
and fees that a consumer pays, and other finance charges such as 
mortgage insurance premiums. Loans with APRs at least 3 percentage 
points higher than the rate on Treasury securities of comparable 
maturity are considered high-priced. Our analysis of 2005 HMDA data 
indicates that approximately 90 percent of the loans we had identified 
as subprime were high-priced. In contrast, less than 2 percent of FHA- 
insured loans made that year were high-priced.

Highly leveraged and weaker credit borrowers--the typical subprime 
borrowers who have obtained nontraditional mortgage products such as 
hybrid ARMs--are the most vulnerable to payment shocks.[Footnote 32] 
Although borrowers could avoid mortgage resets by refinancing to fixed- 
rate mortgages, many of these borrowers face challenges to refinancing 
their subprime loans. For example, about two-thirds of subprime loans 
originated in 2005 had prepayment penalties--a substantially higher 
proportion than in other market segments. FHA, for instance, does not 
permit prepayment penalties on the loans it insures. Prepayment 
penalties generally last from 2 to 4 years from the mortgage 
origination date and can amount to 4 to 5 percent of the original loan 
amount. They can make it expensive to refinance because borrowers must 
pay the penalty if they wish to pay off the original loan before the 
prepayment period expires. In addition, subprime borrowers who made 
little or no down payment and live in areas that experienced home price 
depreciation may not have sufficient equity to refinance.

Borrowers who obtained subprime mortgages have experienced relatively 
high rates of default (i.e., more than 90 days past due) and 
foreclosure (i.e., in any stage of the foreclosure process). According 
to MBA, as of December 31, 2006, the cumulative default and foreclosure 
rates for all subprime mortgages were 7.78 and 4.53 percent, 
respectively. For subprime ARMs, the corresponding figures were 9.16 
and 5.62 percent. In comparison, as of the same date, the default and 
foreclosure rates for FHA-insured loans were 5.78 and 2.19 percent, 
respectively (6.62 and 2.54 percent for ARMs) and for prime loans, were 
0.86 and 0.50, respectively (1.45 and 0.92 for ARMs).[Footnote 33]

Some mortgage industry researchers predict that subprime default and 
foreclosure rates likely will worsen as the loans age; a substantial 
portion of these loans have yet to reach the age when loans tend to 
experience the highest rates of default and foreclosure--between 4 and 
7 years. Furthermore, because most recent subprime loans have 
adjustable-rate features, default and foreclosure rates for ARMs are in 
particular danger of increasing as interest rate resets cause monthly 
mortgage payments on these loans to rise. A recent study by the 
director of research and analytics at First American CoreLogic (one of 
the largest private sector providers of mortgage information) 
illustrates the potential scope of the problem posed by ARM resets. The 
study, which examined 8.37 million ARMs originated in 2004 through 
2006, estimated that 1.1 million (13 percent) of these loans would go 
into foreclosure as they reset over the next 6 to 7 years.[Footnote 34]

Although the subprime and FHA market segments both serve higher-risk 
borrowers, the extent to which subprime borrowers currently at risk of 
default would have qualified for FHA-insured loans is not known. Such a 
determination would require analysis of detailed, loan-level data for 
subprime mortgages. Recently, a number of proposals have been made to 
help subprime borrowers at risk of foreclosure refinance into lower- 
cost fixed rate mortgages. For example, in April 2007, Freddie Mac 
announced plans to purchase $20 billion in mortgages that would 
refinance troubled subprime loans. Fannie Mae announced a similar 
initiative that same month.

Certain factors associated with FHA's decline in market share also 
contributed to a worsening in indicators of credit risk among FHA 
borrowers. More specifically, as conventional lenders expanded their 
presence in traditional FHA submarkets through the development of new 
products and use of automated underwriting tools, FHA experienced 
adverse selection--that is, conventional providers identified and 
approved relatively lower-risk borrowers, leaving relatively higher- 
risk borrowers for FHA. According to analysis by FHA, FHA's loan 
portfolio is becoming riskier in terms of the proportions of loans with 
high LTV, payment-to-income, and debt-to-income ratios.[Footnote 35] 
(Lenders use these ratios to assess the creditworthiness of borrowers.) 
For instance, FHA's analysis indicated that the proportion of loans 
with effective LTV ratios over 97 percent rose from about 40 percent in 
1999 to almost 60 percent in 2005. The higher the LTV ratio, the less 
equity borrowers have in their homes and the more likely it is that 
they may default on mortgage obligations. As we reported in November 
2005, the substantial portion of FHA-insured loans with down-payment 
assistance do not perform as well as loans without such assistance, due 
partly to homebuyers having less equity in the transaction.[Footnote 
36] The changes in borrower characteristics have contributed to a 
decline in FHA's financial performance. In recent years, the credit 
subsidy rate for FHA's single-family mortgage insurance program has 
approached zero (the point at which estimated cash outflows equal 
estimated cash inflows). Furthermore, FHA has estimated that, absent 
program changes, the program for the first time would require a 
positive subsidy (i.e., appropriations) in fiscal year 2008. Therefore, 
it has been changes in the credit quality, rather than the volume, of 
loans FHA insures that have had the most significant implications for 
FHA.

Observations:

Our analysis shows that in 2005 FHA was a much smaller part of the 
market for home purchase mortgages than it was just a few years 
earlier. Given FHA's history of serving minority and lower-income 
homebuyers, the agency's sharp drop-off in market share among these 
populations is particularly notable. Furthermore, the growth in low-and 
no-down-payment mortgages offered by conventional lenders has made 
FHA's product offerings less distinct. These trends raise questions 
about FHA's ability to fulfill its traditional role and operate 
successfully in a changing and competitive mortgage market. However, 
consistent with FHA's mission, substantial proportions of recent FHA 
borrowers are minorities and lower-income families, including many 
first-time homebuyers. Additionally, in the event of an economic 
downturn, FHA could help ensure the flow of mortgage credit to areas 
that private sector market participants may be reluctant to serve. 
Furthermore, recent developments in the subprime market may result in 
an increase in FHA's role in the mortgage market. For example, 
relatively high default and foreclosure rates for subprime mortgages 
and a contraction of this market segment could shift market share to 
FHA. The extent to which this occurs will depend partly on the efforts 
of conventional mortgage providers, including Freddie Mac and Fannie 
Mae, to provide alternatives to subprime borrowers. As our report 
noted, the GSEs have played a larger role among traditional FHA 
homebuyers and recently have proposed steps that would provide 
additional mortgage choices to many borrowers who obtained subprime 
loans.

Although further analysis would be required to determine how many 
subprime borrowers at risk of default would qualify for FHA-insured 
mortgages, FHA could be a vehicle to provide lower-priced and more 
sustainable mortgage options for some borrowers who are considering or 
struggling to maintain higher-priced subprime loans. FHA's recent 
efforts to modernize its products and processes might facilitate any 
expansion of the agency's role by increasing its operational efficiency 
and flexibility. However, attracting subprime borrowers to FHA could 
also have costs, as some of these borrowers may pose relatively high 
insurance risks. Careful assessment and management of these risks would 
be necessary to avoid exacerbating problems in the financial 
performance of FHA's insurance program.

Agency Comments and Our Evaluation:

We provided HUD with a draft of this report. HUD provided comments in a 
letter from the Assistant Secretary for Housing-Federal Housing 
Commissioner (see app. IV). HUD stated that we produced a 
straightforward, well-researched report on the reasons for the recent 
decline in FHA's market share.

HUD also provided observations about the homebuyers FHA serves and the 
shift of some traditional FHA borrowers to subprime mortgage products 
that have the potential to become more costly. Additionally, HUD noted 
that additional flexibility, new mortgage insurance products, and risk- 
based pricing would help FHA to continue providing lower-income and 
minority households with homeownership opportunities at lower risk to 
themselves and with manageable risk to FHA's insurance fund.

We are sending copies of this report to the Chairman, Senate Committee 
on Banking, Housing, and Urban Affairs; Chairman and Ranking Member, 
Subcommittee on Housing and Transportation, Senate Committee on 
Banking, Housing, and Urban Affairs; Chairman and Ranking Member, House 
Committee on Financial Services; and Chairman and Ranking Member, 
Subcommittee on Housing and Community Opportunity, House Committee on 
Financial Services. We will also send copies to the Secretary of 
Housing and Urban Development and to other interested parties and make 
copies available to others upon request. In addition, the report will 
be made available at no charge on the GAO Web site at http:// 
www.gao.gov.

Please contact me at (202) 512-8678 or shearw@gao.gov if you or your 
staff have any questions about this report. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this report. Key contributors to this report are 
listed in appendix V.

Signed by: 

William B. Shear: 
Director, Financial Markets and Community Investment:

[End of section]

Appendix I: Objectives, Scope, and Methodology:

Our objectives were to determine (1) trends in the Federal Housing 
Administration's (FHA) share of the market for home purchase mortgages 
and selected submarkets from 1996 through 2005, and how they compared 
with the trends for the prime, subprime, and government-sponsored 
enterprises (GSE) market segments; and (2) the major factors associated 
with the trends in FHA's market share and the potential implications of 
these trends for homebuyers and FHA. To supplement this analysis, we 
also developed information on the borrower and loan characteristics of 
FHA-insured mortgages and mortgages in the prime and subprime market 
segments from 1996 through 2005 (see app. III).

Analysis of Market Share Trends:

To analyze trends in the overall market for home purchase mortgages, we 
compiled and analyzed loan data for 1996 through 2005 collected under 
the Home Mortgage Disclosure Act (HMDA).[Footnote 37] HMDA data are 
compiled and published by the Federal Financial Institutions 
Examination Council (FFIEC).[Footnote 38] HMDA requires lending 
institutions to collect and publicly disclose information about housing 
loans and applications for such loans. This information includes, among 
other things, the market participant or segment (conventional, FHA, 
Veterans Administration (VA), Rural Housing Service (RHS), GSE), loan 
amount, property type, census tract and certain tract characteristics, 
and loan applicant characteristics such as race, gender, and income. 
HMDA data capture about 80 percent of the mortgage loans funded each 
year, according to estimates by the Federal Reserve, and are one of the 
most comprehensive source of information on mortgage lending. In 
general, we limited our analysis to home purchase loans originated for 
owner-occupied, one-to-four family and manufactured homes. To the 
extent possible, we identified piggyback loans (i.e., the junior lien 
in a pair of loans used to finance the same property) using a data- 
matching process based on an algorithm developed by the Federal Reserve 
and excluded these loans from our analysis.[Footnote 39] As a result, 
our analysis focuses on first liens only. Because the HMDA data do not 
contain an indicator for subprime loans, we identified subprime loans 
by merging the data with a list--maintained by the Department of 
Housing and Urban Development (HUD)--of lenders that specialize in 
subprime lending. HUD's Office of Policy Development and Research 
compiles this list annually by analyzing HMDA data (e.g., lenders with 
lower origination rates and a large share of refinance loans are more 
likely to be subprime lenders) and contacting lenders directly. We 
designated conventional loans that were not attributable to subprime 
lenders as prime loans. However, because subprime specialists may 
originate some prime loans and nonsubprime specialists may originate 
some subprime loans, any analysis that uses this list will misclassify 
mortgages to some extent. Finally, HMDA data do not capture all of the 
loans purchased by the GSEs. According to GSE and Federal Reserve 
officials, HMDA data do not capture all of the loans the GSEs purchase, 
including (1) many loans initially sold to intermediaries (e.g., bank 
affiliates) and subsequently to the GSEs and (2) loans originated and 
purchased in different years. While we acknowledge these limitations, 
we used HMDA data to evaluate long-term market share trends rather than 
to provide precise annual figures for each market segment, including 
the GSE segment. According to Freddie Mac, Fannie Mae, and Federal 
Reserve officials, our use of HMDA data was appropriate for this 
purpose. Our analysis should be interpreted with these limitations in 
mind.

To analyze trends in various submarkets, we incorporated additional 
data from FHA, the Census Bureau, the Office of Federal Housing 
Enterprise Oversight (OFHEO), and TransUnion (one of the three main 
consumer credit reporting agencies). More specifically, from FHA we 
obtained annual nationwide data on FHA's loan limits for single-family 
properties. From the 2000 Decennial Census, we obtained information on 
the median house price for each census tract. From OFHEO, we obtained 
their annual house price appreciation index for all metropolitan 
statistical areas. Finally, from TransUnion, we obtained median credit 
scores for mortgage borrowers in each census tract nationwide as of 
December 31, 2004. We analyzed a number of submarkets defined by 
borrower race, borrower income, loan amount relative to FHA's loan 
limits, income and minority composition of the census tract in which 
the property was located, and whether the property was owner-occupied. 
We defined borrower race based on categories in the HMDA data. Prior to 
2004, HMDA data included Hispanic as a race category but beginning in 
2004 also included Hispanic as an ethnicity variable. For 2004 and 
2005, we classified borrowers of Hispanic ethnicity as Hispanic race. 
We created borrower income categories using median family incomes 
calculated by HUD each year for metropolitan and nonmetropolitan areas. 
We defined borrowers with incomes of less than 80 percent of the area 
median income as low income, those with incomes of at least 80 percent 
but less than 120 percent of the area median as moderate income, and 
those with incomes of at least 120 percent of area median as upper 
income. Finally, we determined the FHA-eligible submarket by 
identifying loans with dollar amounts that fell within the relevant FHA 
loan limit.

For our analysis of census tract groupings, we limited our examination 
to census tracts where FHA's market share averaged at least 5 percent 
from 1996 through 1998. (We took this approach because our analysis 
examined changes in FHA's market share during a 10-year period when the 
trend in FHA's share was downward.) Therefore, our analysis excluded 
census tracts where FHA's market share started and ended the period at 
zero and census tracts where FHA's market share was sporadic and on 
average very small near the beginning of the period. We used Census 
Bureau files relating 1990 census tract definitions to 2000 census 
tract definitions to provide consistent geographic areas over the time 
period of our analysis. The large majority of the census tracts were 
the same in both 1990 and 2000. In many cases, however, 1990 census 
tracts were split into more than one 2000 census tract. In those cases, 
we aggregated the affected 2000 census tracts to the corresponding 1990 
tract definitions and used the 1990 tracts as the unit of analysis for 
the entire 1996 through 2005 period. In other cases, two or more 1990 
census tracts were combined to form one 2000 census tract. In those 
instances, we aggregated the affected 1990 tracts that corresponded to 
the 2000 tract definitions and used the 2000 tracts as the unit of 
analysis over the entire period.

We grouped the census tracts according to the percentage of the 
population that was minority, median income, median credit score, and 
median home price in relation to FHA loan limits. We defined low-, 
medium-, and high-minority census tracts as those with minority 
populations of less than 20 percent, 20 to 49 percent, and more than 50 
percent, respectively. We defined low-, moderate-, and upper-income 
census tracts as those with median incomes that were less than 80 
percent, at least 80 percent but less than 120 percent, and 120 percent 
and above, respectively, of the median income for the associated 
metropolitan statistical area. We also grouped census tracts based on 
the TransUnion median credit score for mortgage borrowers as of 
December 31, 2004. We categorized census tracts into three groups: 
those with median credit scores in the bottom quarter of the credit 
score distribution for all census tracts included in our analysis, 
those with median scores between the bottom and top quarter, and those 
with median scores in the top quarter. Finally, we created three census 
tract groupings based on whether the median home price was below 75 
percent of the applicable FHA loan limit each year, 75 to 125 percent 
of the FHA limit each year, or below 75 percent of the loan limit at 
the beginning of the 10-year period but at or above 75 percent of the 
limit later in the period.

We assessed the reliability of the data we used by reviewing existing 
information about the quality of the data, performing electronic data 
testing to detect errors in completeness and reasonableness, and 
interviewing Freddie Mac, Fannie Mae, FHA, and Federal Reserve 
officials knowledgeable about the data. We determined that the data 
were sufficiently reliable for the purposes of this report.

Analysis of Factors Associated with the Trends in FHA's Market Share 
and the Implications of These Trends:

To analyze factors associated with the trends in FHA's market share and 
the implications of these trends, we used information from: the 
analysis described in the previous section, HMDA data, HUD's Single- 
Family Data Warehouse (SFDW), summary statistics provided by FHA and 
contained in prior studies from databases maintained by 
LoanPerformance, the Mortgage Bankers Association's (MBA) National 
Delinquency Survey for the fourth quarter of 2006, and other published 
industry data. In order to assess the reliability of the data we used, 
we reviewed related documentation and interviewed officials familiar 
with the data. In addition, for the HMDA and SFDW data, we performed 
internal checks to determine the extent to which the data fields were 
populated and the reasonableness of the values contained in the fields. 
We concluded that the data were sufficiently reliable for the purposes 
of this report. We also reviewed relevant academic literature and 
government and industry studies, including internal FHA analysis of 
SFDW data.

In addition to our data analysis, we interviewed representatives of 
four FHA lenders (Countrywide Financial, Wells Fargo, Bank of America, 
and Lenders One--a mortgage cooperative representing 87 independent 
mortgage bankers). We also interviewed officials from Fannie Mae, 
Freddie Mac, and four private mortgage insurance companies--AIG United 
Guaranty, Genworth Financial, Mortgage Guaranty Insurance Corporation, 
and PMI Mortgage Insurance Company. Additionally, we interviewed 
representatives of six mortgage and real estate industry groups--MBA, 
National Association of Realtors, Mortgage Insurance Companies of 
America, National Association of Home Builders, National Association of 
Mortgage Brokers, and American Financial Services Association. We also 
spoke with representatives of the following consumer advocacy groups: 
Center for Responsible Lending, Consumer Action, Consumer Federation of 
America, National Association of Consumer Advocates, National Community 
Reinvestment Coalition, National Consumer Law Center, and National 
Council of La Raza. Finally, we interviewed officials from FHA and 
HUD's Office of Policy Development and Research.

Analysis of Borrower and Loan Characteristics:

To determine the percentages of FHA, prime, and subprime home purchase 
loans with certain borrower and loan characteristics each year from 
1996 through 2005, we analyzed information from HMDA data, SFDW, the 
Federal Housing Finance Board, and summary LoanPerformance data. The 
borrower and loan characteristics were race, income, loan type (fixed 
or adjustable rate), and presence of prepayment penalty. We also 
determined the average interest rate at mortgage origination, loan 
amount, and median credit score for FHA-insured loans and loans in the 
other market segments. In order to assess the reliability of the data 
we used, we reviewed existing information about the data quality and 
discussed the data with knowledgeable officials to ensure that we 
interpreted the information correctly. For the HMDA and SFDW data, we 
also performed electronic testing to assess the reasonableness and 
completeness of the information. We concluded that the data were 
sufficiently reliable for the purposes of our report.

We conducted this work in Washington, D.C. from September 2006 through 
May 2007 in accordance with generally accepted government auditing 
standards.

[End of section]

Appendix II: Data on Market Share Trends in the Mortgage Market and 
Selected Submarkets from 1996 through 2005:

This appendix contains the results of our analysis using Home Mortgage 
Disclosure Act (HMDA) and Federal Housing Administration (FHA) data for 
calendar years 1996 through 2005. Tables 1 through 3 provide 
information on home purchase mortgages. More specifically, table 1 
contains market shares for FHA and other market participants and 
segments over the 10-year period. Table 2 contains FHA market shares 
and numbers of mortgages in each state. Table 3 contains market shares 
in selected submarkets for FHA and other market participants and 
segments. Table 4 provides market shares for home purchase and 
refinance loans combined. Finally, table 5 provides market shares for 
refinance loans.

Table 1: Market Shares for Home Purchase Loans, 1996-2005:

Market shares.

Market shares: Prime; 1996: 73.2%; 1997: 71.8%; 1998: 72.8%; 1999: 
71.5%; 2000: 71.2%; 2001: 71.1%; 2002: 73.0%; 2003: 74.0%; 2004: 75.7%; 
2005: 76.4%.

Market shares: Subprime; 1996: 1.6; 1997: 2.6; 1998: 3.7; 1999: 4.5; 
2000: 5.9; 2001: 5.0; 2002: 6.6; 2003: 9.3; 2004: 12.0; 2005: 14.5.

Market shares: FHA; 1996: 18.8; 1997: 19.6; 1998: 17.6; 1999: 19.0; 
2000: 18.6; 2001: 19.3; 2002: 16.5; 2003: 13.1; 2004: 9.2; 2005: 6.3.

Market shares: VA; 1996: 6.0; 1997: 5.4; 1998: 5.3; 1999: 4.5; 2000: 
3.9; 2001: 4.2; 2002: 3.6; 2003: 3.1; 2004: 2.6; 2005: 2.4.

Market shares: RHS; 1996: 0.4; 1997: 0.5; 1998: 0.6; 1999: 0.5; 2000: 
0.4; 2001: 0.4; 2002: 0.4; 2003: 0.5; 2004: 0.4; 2005: 0.4.

Market shares: GSE; 1996: 26.8; 1997: 26.6; 1998: 32.6; 1999: 29.2; 
2000: 30.1; 2001: 35.1; 2002: 39.3; 2003: 38.2; 2004: 35.1; 2005: 30.4.

Number of loans.

Prime; 1996: 2,270,445; 1997: 2,338,558; 1998: 2,793,403; 1999: 
2,914,713; 2000: 2,825,668; 2001: 2,852,557; 2002: 2,928,394; 2003: 
3,174,378; 2004: 3,400,642; 2005: 3,557,981.

Subprime; 1996: 48,778; 1997: 85,721; 1998: 143,395; 1999: 181,779; 
2000: 235,044; 2001: 199,875; 2002: 265,000; 2003: 397,833; 2004: 
540,352; 2005: 675,389.

FHA; 1996: 582,781; 1997: 637,354; 1998: 675,737; 1999: 774,259; 2000: 
737,914; 2001: 776,380; 2002: 660,726; 2003: 561,582; 2004: 413,754; 
2005: 294,777.

VA; 1996: 187,424; 1997: 176,768; 1998: 201,973; 1999: 183,875; 2000: 
156,767; 2001: 168,365; 2002: 142,673; 2003: 134,759; 2004: 117,961; 
2005: 109,873.

RHS; 1996: 13,122; 1997: 16,804; 1998: 21,961; 1999: 19,716; 2000: 
14,304; 2001: 16,906; 2002: 16,600; 2003: 21,773; 2004: 19,696; 2005: 
18,471.

GSE; 1996: 831,869; 1997: 865,428; 1998: 1,250,629; 1999: 1,188,913; 
2000: 1,193,653; 2001: 1,408,297; 2002: 1,576,259; 2003: 1,639,462; 
2004: 1,577,474; 2005: 1,415,366.

Source: GAO analysis of HMDA data.

Note: We calculated market shares based on numbers of loans and, to the 
extent possible, excluded piggyback loans. The prime, subprime, FHA, 
VA, and RHS market shares add to 100 percent (figures used in this 
table were rounded to the nearest tenth of a percent). The GSE market 
segment is primarily a subset of the prime market segment. Data for the 
GSEs do not include loans originated and purchased in different years 
or all of the loans sold to intermediaries before being purchased by 
the GSEs.

[End of table]

Table 2: State-by-State FHA Market Shares and Loan Counts for Home 
Purchase Loans, 1996-2005:

State: Alabama; Market Shares: 1996: 12.8%; 1997: 12.6%; 1998: 11.9%; 
1999: 13.9%; 2000: 16.8%; 2001: 19.7%; 2002: 19.2%; 2003: 16.3%; 2004: 
13.0%; 2005: 10.4%.

State: Alaska; Market Shares: 1996: 27.5; 1997: 37.0; 1998: 31.0; 1999: 
30.6; 2000: 29.0; 2001: 29.2; 2002: 27.6; 2003: 24.7; 2004: 20.5; 2005: 
14.1.

State: Arizona; Market Shares: 1996: 22.3; 1997: 22.1; 1998: 20.1; 
1999: 21.7; 2000: 22.6; 2001: 23.1; 2002: 20.5; 2003: 15.8; 2004: 8.6; 
2005: 2.8.

State: Arkansas; Market Shares: 1996: 22.9; 1997: 22.4; 1998: 19.4; 
1999: 20.3; 2000: 20.5; 2001: 23.9; 2002: 22.9; 2003: 20.8; 2004: 16.1; 
2005: 13.4.

State: California; Market Shares: 1996: 23.9; 1997: 24.1; 1998: 21.8; 
1999: 21.5; 2000: 18.8; 2001: 16.8; 2002: 11.0; 2003: 6.1; 2004: 1.9; 
2005: 0.6.

State: Colorado; Market Shares: 1996: 25.5; 1997: 27.0; 1998: 22.2; 
1999: 25.3; 2000: 24.1; 2001: 24.7; 2002: 26.7; 2003: 24.1; 2004: 15.5; 
2005: 8.9.

State: Connecticut; Market Shares: 1996: 19.1; 1997: 19.2; 1998: 17.9; 
1999: 18.8; 2000: 19.0; 2001: 19.1; 2002: 15.1; 2003: 12.2; 2004: 9.3; 
2005: 7.3.

State: Delaware; Market Shares: 1996: 16.3; 1997: 17.2; 1998: 18.7; 
1999: 17.0; 2000: 18.4; 2001: 20.0; 2002: 16.5; 2003: 11.8; 2004: 8.3; 
2005: 5.5.

State: District of Columbia; Market Shares: 1996: 24.3; 1997: 22.3; 
1998: 21.9; 1999: 22.1; 2000: 20.7; 2001: 17.3; 2002: 12.6; 2003: 6.8; 
2004: 4.3; 2005: 0.9.

State: Florida; Market Shares: : 16.0; 1997: 17.9; 1998: 17.5; 1999: 
17.7; 2000: 17.0; 2001: 16.7; 2002: 12.7; 2003: 9.8; 2004: 6.2; 2005: 
3.2.

State: Georgia; Market Shares: 1996: 17.5; 1997: 18.4; 1998: 15.8; 
1999: 21.1; 2000: 21.0; 2001: 23.4; 2002: 22.2; 2003: 18.2; 2004: 14.6; 
2005: 10.7.

State: Hawaii; Market Shares: 1996: 9.1; 1997: 13.1; 1998: 12.6; 1999: 
12.9; 2000: 9.0; 2001: 7.3; 2002: 5.2; 2003: 3.3; 2004: 1.3; 2005: 1.2.

State: Idaho; Market Shares: 1996: 25.3; 1997: 23.5; 1998: 21.5; 1999: 
23.9; 2000: 23.4; 2001: 25.8; 2002: 22.4; 2003: 20.0; 2004: 13.5; 2005: 
8.8.

State: Illinois; Market Shares: 1996: 17.8; 1997: 19.9; 1998: 15.6; 
1999: 18.6; 2000: 16.8; 2001: 17.6; 2002: 15.5; 2003: 12.2; 2004: 7.9; 
2005: 4.9.

State: Indiana; Market Shares: 1996: 18.7; 1997: 21.1; 1998: 18.4; 
1999: 20.0; 2000: 21.9; 2001: 27.6; 2002: 24.3; 2003: 21.3; 2004: 17.0; 
2005: 13.6.

State: Iowa; Market Shares: 1996: 11.6; 1997: 13.8; 1998: 13.0; 1999: 
13.5; 2000: 12.7; 2001: 14.4; 2002: 11.5; 2003: 9.8; 2004: 7.9; 2005: 
6.3.

State: Kansas; Market Shares: 1996: 15.2; 1997: 15.1; 1998: 14.8; 1999: 
16.3; 2000: 15.9; 2001: 18.0; 2002: 16.5; 2003: 14.1; 2004: 12.1; 2005: 
9.7.

State: Kentucky; Market Shares: 1996: 14.8; 1997: 14.6; 1998: 13.9; 
1999: 15.1; 2000: 15.9; 2001: 17.6; 2002: 17.1; 2003: 15.3; 2004: 12.5; 
2005: 9.9.

State: Louisiana; Market Shares: 1996: 19.0; 1997: 18.5; 1998: 18.9; 
1999: 21.5; 2000: 21.4; 2001: 22.4; 2002: 20.0; 2003: 15.6; 2004: 13.1; 
2005: 9.4.

State: Maine; Market Shares: 1996: 20.5; 1997: 20.9; 1998: 18.2; 1999: 
18.4; 2000: 15.8; 2001: 15.0; 2002: 12.9; 2003: 7.0; 2004: 7.5; 2005: 
5.3.

State: Maryland; Market Shares: 1996: 33.7; 1997: 35.6; 1998: 34.1; 
1999: 32.7; 2000: 31.6; 2001: 30.4; 2002: 25.5; 2003: 16.6; 2004: 9.5; 
2005: 3.4.

State: Massachusetts; Market Shares: 1996: 9.8; 1997: 12.1; 1998: 10.0; 
1999: 11.0; 2000: 10.8; 2001: 10.6; 2002: 8.1; 2003: 5.8; 2004: 3.0; 
2005: 1.6.

State: Michigan; Market Shares: 1996: 15.3; 1997: 18.0; 1998: 15.2; 
1999: 17.0; 2000: 16.4; 2001: 18.0; 2002: 16.4; 2003: 12.8; 2004: 10.0; 
2005: 7.5.

State: Minnesota; Market Shares: 1996: 26.5; 1997: 24.7; 1998: 18.1; 
1999: 19.0; 2000: 17.2; 2001: 18.1; 2002: 15.4; 2003: 11.9; 2004: 8.4; 
2005: 6.1.

State: Mississippi; Market Shares: 1996: 21.8; 1997: 18.6; 1998: 16.4; 
1999: 15.5; 2000: 18.0; 2001: 22.9; 2002: 21.2; 2003: 18.0; 2004: 13.9; 
2005: 12.1.

State: Missouri; Market Shares: 1996: 21.5; 1997: 20.7; 1998: 18.2; 
1999: 19.6; 2000: 19.7; 2001: 20.7; 2002: 18.2; 2003: 14.4; 2004: 11.6; 
2005: 9.0.

State: Montana; Market Shares: 1996: 22.1; 1997: 20.2; 1998: 18.0; 
1999: 18.2; 2000: 20.2; 2001: 23.7; 2002: 22.1; 2003: 18.5; 2004: 16.8; 
2005: 12.5.

State: Nebraska; Market Shares: 1996: 21.4; 1997: 25.4; 1998: 23.5; 
1999: 25.8; 2000: 26.7; 2001: 25.8; 2002: 25.1; 2003: 19.1; 2004: 13.0; 
2005: 10.6.

State: Nevada; Market Shares: 1996: 25.7; 1997: 27.8; 1998: 22.8; 1999: 
27.2; 2000: 23.6; 2001: 20.2; 2002: 18.1; 2003: 13.1; 2004: 5.0; 2005: 
2.4.

State: New Hampshire; Market Shares: 1996: 20.7; 1997: 20.6; 1998: 
17.9; 1999: 16.1; 2000: 14.7; 2001: 13.7; 2002: 10.1; 2003: 7.6; 2004: 
3.7; 2005: 2.2.

State: New Jersey; Market Shares: 1996: 16.4; 1997: 17.6; 1998: 16.0; 
1999: 17.9; 2000: 17.1; 2001: 16.0; 2002: 12.2; 2003: 10.1; 2004: 6.1; 
2005: 3.7.

State: New Mexico; Market Shares: 1996: 15.0; 1997: 14.9; 1998: 14.2; 
1999: 18.4; 2000: 19.8; 2001: 23.9; 2002: 24.5; 2003: 20.5; 2004: 15.9; 
2005: 11.3.

State: New York; Market Shares: 1996: 16.3; 1997: 16.8; 1998: 16.1; 
1999: 16.2; 2000: 15.2; 2001: 14.8; 2002: 11.6; 2003: 9.6; 2004: 6.5; 
2005: 5.2.

State: North Carolina; Market Shares: 1996: 12.3; 1997: 12.9; 1998: 
10.5; 1999: 13.0; 2000: 15.1; 2001: 17.3; 2002: 16.3; 2003: 13.3; 2004: 
10.7; 2005: 8.4.

State: North Dakota; Market Shares: 1996: 25.7; 1997: 26.6; 1998: 28.8; 
1999: 27.4; 2000: 23.8; 2001: 27.6; 2002: 22.1; 2003: 18.5; 2004: 18.2; 
2005: 15.9.

State: Ohio; Market Shares: 1996: 14.8; 1997: 17.4; 1998: 16.1; 1999: 
17.5; 2000: 18.6; 2001: 20.4; 2002: 17.7; 2003: 14.7; 2004: 11.8; 2005: 
9.5.

State: Oklahoma; Market Shares: 1996: 25.4; 1997: 24.2; 1998: 25.3; 
1999: 25.4; 2000: 22.9; 2001: 25.4; 2002: 23.4; 2003: 22.1; 2004: 17.2; 
2005: 14.8.

State: Oregon; Market Shares: 1996: 12.7; 1997: 12.5; 1998: 10.3; 1999: 
13.9; 2000: 15.1; 2001: 17.1; 2002: 14.3; 2003: 11.3; 2004: 6.4; 2005: 
3.3.

State: Pennsylvania; Market Shares: 1996: 15.1; 1997: 16.8; 1998: 15.6; 
1999: 16.1; 2000: 16.2; 2001: 17.5; 2002: 14.1; 2003: 10.6; 2004: 7.9; 
2005: 5.9.

State: Rhode Island; Market Shares: 1996: 21.7; 1997: 25.1; 1998: 22.5; 
1999: 24.4; 2000: 23.5; 2001: 22.7; 2002: 17.3; 2003: 13.1; 2004: 7.7; 
2005: 3.4.

State: South Carolina; Market Shares: 1996: 8.4; 1997: 8.3; 1998: 6.0; 
1999: 8.2; 2000: 10.0; 2001: 11.3; 2002: 10.3; 2003: 8.8; 2004: 7.7; 
2005: 5.6.

State: South Dakota; Market Shares: 1996: 20.4; 1997: 21.0; 1998: 19.5; 
1999: 19.2; 2000: 17.6; 2001: 18.4; 2002: 17.4; 2003: 17.1; 2004: 13.5; 
2005: 8.7.

State: Tennessee; Market Shares: 1996: 25.6; 1997: 24.0; 1998: 21.5; 
1999: 22.5; 2000: 21.5; 2001: 24.7; 2002: 21.9; 2003: 18.8; 2004: 13.9; 
2005: 10.2.

State: Texas; Market Shares: 1996: 20.9; 1997: 21.1; 1998: 20.5; 1999: 
21.7; 2000: 20.9; 2001: 22.8; 2002: 22.3; 2003: 20.4; 2004: 18.0; 2005: 
13.3.

State: Utah; Market Shares: 1996: 27.3; 1997: 27.4; 1998: 22.0; 1999: 
26.5; 2000: 29.9; 2001: 33.0; 2002: 29.6; 2003: 26.3; 2004: 19.3; 2005: 
12.2.

State: Vermont; Market Shares: 1996: 4.6; 1997: 8.1; 1998: 7.2; 1999: 
7.3; 2000: 7.6; 2001: 8.2; 2002: 5.6; 2003: 4.9; 2004: 3.4; 2005: 2.2.

State: Virginia; Market Shares: 1996: 24.7; 1997: 24.0; 1998: 21.9; 
1999: 22.7; 2000: 22.8; 2001: 22.0; 2002: 17.8; 2003: 13.1; 2004: 7.4; 
2005: 4.4.

State: Washington; Market Shares: 1996: 17.2; 1997: 16.6; 1998: 12.4; 
1999: 15.5; 2000: 15.6; 2001: 17.9; 2002: 15.6; 2003: 12.6; 2004: 7.6; 
2005: 4.1.

State: West Virginia; Market Shares: 1996: 9.2; 1997: 7.5; 1998: 8.1; 
1999: 9.2; 2000: 10.3; 2001: 12.3; 2002: 12.1; 2003: 8.7; 2004: 7.3; 
2005: 6.5.

State: Wisconsin; Market Shares: 1996: 5.1; 1997: 6.6; 1998: 5.6; 1999: 
6.8; 2000: 7.0; 2001: 8.6; 2002: 7.4; 2003: 6.1; 2004: 4.9; 2005: 4.3.

State: Wyoming; Market Shares: 1996: 22.0; 1997: 22.2; 1998: 18.2; 
1999: 20.1; 2000: 18.0; 2001: 18.0; 2002: 15.1; 2003: 12.2; 2004: 10.3; 
2005: 7.8.

State: Number of loans.

State: Alabama; Number of loans: 1996: 6,321; 1997: 6,976; 1998: 7,358; 
1999: 8,892; 2000: 9,682; 2001: 10,444; 2002: 9,504; 2003: 9,122; 2004: 
7,731; 2005: 6,602.

State: Alaska; Number of loans: 1996: 1,380; 1997: 2,092; 1998: 2,111; 
1999: 1,819; 2000: 1,805; 2001: 2,043; 2002: 2,007; 2003: 2,102; 2004: 
2,246; 2005: 1,567.

State: Arizona; Number of loans: 1996: 18,510; 1997: 18,091; 1998: 
20,041; 1999: 23,248; 2000: 23,051; 2001: 25,711; 2002: 22,984; 2003: 
19,509; 2004: 11,942; 2005: 4,213.

State: Arkansas; Number of loans: 1996: 5,115; 1997: 5,638; 1998: 
5,297; 1999: 6,065; 2000: 5,960; 2001: 7,117; 2002: 6,310; 2003: 6,354; 
2004: 5,225; 2005: 4,629.

State: California; Number of loans: 1996: 77,824; 1997: 89,847; 1998: 
96,097; 1999: 104,377; 2000: 92,884; 2001: 80,582; 2002: 58,350; 2003: 
33,652; 2004: 10,786; 2005: 3,226.

State: Colorado; Number of loans: 1996: 19,302; 1997: 20,986; 1998: 
21,691; 1999: 26,302; 2000: 25,603; 2001: 25,672; 2002: 25,527; 2003: 
23,320; 2004: 15,587; 2005: 9,222.

State: Connecticut; Number of loans: 1996: 7,433; 1997: 7,717; 1998: 
8,827; 1999: 10,189; 2000: 9,494; 2001: 9,794; 2002: 7,923; 2003: 
6,397; 2004: 5,153; 2005: 3,970.

State: Delaware; Number of loans: 1996: 1,576; 1997: 1,850; 1998: 
2,364; 1999: 2,221; 2000: 2,297; 2001: 2,433; 2002: 2,064; 2003: 1,508; 
2004: 1,114; 2005: 804.

State: District of Columbia; Number of loans: 1996: 1,078; 1997: 1,194; 
1998: 1,565; 1999: 1,799; 2000: 1,673; 2001: 1,385; 2002: 1,013; 2003: 
579; 2004: 411; 2005: 86.

State: Florida; Number of loans: 1996: 35,857; 1997: 41,886; 1998: 
49,058; 1999: 53,671; 2000: 51,341; 2001: 52,985; 2002: 40,258; 2003: 
33,967; 2004: 22,818; 2005: 12,703.

State: Georgia; Number of loans: 1996: 18,095; 1997: 20,908; 1998: 
21,269; 1999: 30,766; 2000: 27,943; 2001: 31,741; 2002: 28,307; 2003: 
26,148; 2004: 22,582; 2005: 17,705.

State: Hawaii; Number of loans: 1996: 547; 1997: 891; 1998: 993; 1999: 
1,187; 2000: 879; 2001: 673; 2002: 619; 2003: 494; 2004: 190; 2005: 171.

State: Idaho; Number of loans: 1996: 3,456; 1997: 3,795; 1998: 4,226; 
1999: 4,997; 2000: 4,659; 2001: 5,377; 2002: 4,541; 2003: 4,831; 2004: 
3,570; 2005: 2,733.

State: Illinois; Number of loans: 1996: 26,411; 1997: 28,586; 1998: 
25,976; 1999: 34,091; 2000: 30,830; 2001: 32,595; 2002: 28,867; 2003: 
24,257; 2004: 16,281; 2005: 10,367.

State: Indiana; Number of loans: 1996: 13,508; 1997: 15,265; 1998: 
15,179; 1999: 17,886; 2000: 18,993; 2001: 24,199; 2002: 20,549; 2003: 
19,154; 2004: 15,835; 2005: 13,024.

State: Iowa; Number of loans: 1996: 2,900; 1997: 3,763; 1998: 4,027; 
1999: 4,287; 2000: 3,808; 2001: 4,570; 2002: 3,622; 2003: 3,391; 2004: 
2,884; 2005: 2,452.

State: Kansas; Number of loans: 1996: 4,094; 1997: 4,446; 1998: 5,136; 
1999: 6,067; 2000: 5,304; 2001: 6,327; 2002: 5,440; 2003: 5,008; 2004: 
4,501; 2005: 3,838.

State: Kentucky; Number of loans: 1996: 5,200; 1997: 5,714; 1998: 
6,411; 1999: 6,940; 2000: 7,041; 2001: 7,723; 2002: 7,107; 2003: 7,435; 
2004: 6,205; 2005: 5,131.

State: Louisiana; Number of loans: 1996: 7,799; 1997: 7,578; 1998: 
9,249; 1999: 10,195; 2000: 9,469; 2001: 9,670; 2002: 8,655; 2003: 
7,488; 2004: 6,433; 2005: 4,871.

State: Maine; Number of loans: 1996: 1,742; 1997: 2,198; 1998: 2,311; 
1999: 2,458; 2000: 2,001; 2001: 1,878; 2002: 1,631; 2003: 782; 2004: 
1,188; 2005: 827.

State: Maryland; Number of loans: 1996: 21,739; 1997: 24,431; 1998: 
27,897; 1999: 28,920; 2000: 28,269; 2001: 29,088; 2002: 24,441; 2003: 
16,135; 2004: 9,799; 2005: 3,444.

State: Massachusetts; Number of loans: 1996: 6,977; 1997: 8,931; 1998: 
8,404; 1999: 9,676; 2000: 8,713; 2001: 8,481; 2002: 6,418; 2003: 4,754; 
2004: 2,804; 2005: 1,387.

State: Michigan; Number of loans: 1996: 20,381; 1997: 20,956; 1998: 
22,149; 1999: 26,331; 2000: 24,120; 2001: 25,320; 2002: 22,341; 2003: 
18,291; 2004: 14,356; 2005: 10,212.

State: Minnesota; Number of loans: 1996: 17,164; 1997: 15,323; 1998: 
14,595; 1999: 15,606; 2000: 13,848; 2001: 15,169; 2002: 13,084; 2003: 
10,685; 2004: 7,203; 2005: 5,174.

State: Mississippi; Number of loans: 1996: 5,049; 1997: 5,100; 1998: 
5,168; 1999: 4,809; 2000: 5,215; 2001: 6,153; 2002: 5,261; 2003: 5,065; 
2004: 4,080; 2005: 3,690.

State: Missouri; Number of loans: 1996: 14,228; 1997: 13,840; 1998: 
13,974; 1999: 15,472; 2000: 15,035; 2001: 15,907; 2002: 13,254; 2003: 
11,592; 2004: 10,119; 2005: 8,224.

State: Montana; Number of loans: 1996: 1,253; 1997: 1,464; 1998: 1,587; 
1999: 1,666; 2000: 1,694; 2001: 2,071; 2002: 1,961; 2003: 1,824; 2004: 
1,866; 2005: 1,399.

State: Nebraska; Number of loans: 1996: 2,983; 1997: 3,765; 1998: 
4,197; 1999: 4,572; 2000: 4,745; 2001: 4,389; 2002: 4,624; 2003: 3,918; 
2004: 2,762; 2005: 2,238.

State: Nevada; Number of loans: 1996: 8,974; 1997: 9,938; 1998: 8,989; 
1999: 11,988; 2000: 10,601; 2001: 9,780; 2002: 8,759; 2003: 7,581; 
2004: 3,150; 2005: 1,602.

State: New Hampshire; Number of loans: 1996: 2,511; 1997: 2,912; 1998: 
3,044; 1999: 2,901; 2000: 2,636; 2001: 2,328; 2002: 1,688; 2003: 1,264; 
2004: 731; 2005: 429.

State: New Jersey; Number of loans: 1996: 14,661; 1997: 16,137; 1998: 
17,393; 1999: 21,025; 2000: 19,046; 2001: 17,702; 2002: 13,944; 2003: 
12,283; 2004: 7,623; 2005: 4,585.

State: New Mexico; Number of loans: 1996: 3,018; 1997: 3,086; 1998: 
3,271; 1999: 4,008; 2000: 4,079; 2001: 5,316; 2002: 5,701; 2003: 5,194; 
2004: 4,270; 2005: 3,084.

State: New York; Number of loans: 1996: 20,500; 1997: 22,090; 1998: 
24,313; 1999: 26,064; 2000: 23,589; 2001: 23,055; 2002: 18,735; 2003: 
16,360; 2004: 11,670; 2005: 9,241.

State: North Carolina; Number of loans: 1996: 12,802; 1997: 14,620; 
1998: 13,420; 1999: 17,822; 2000: 18,476; 2001: 20,646; 2002: 17,945; 
2003: 16,005; 2004: 13,933; 2005: 12,040.

State: North Dakota; Number of loans: 1996: 1,260; 1997: 1,394; 1998: 
1,853; 1999: 1,628; 2000: 1,248; 2001: 1,531; 2002: 1,315; 2003: 1,252; 
2004: 1,331; 2005: 1,257.

State: Ohio; Number of loans: 1996: 20,332; 1997: 23,584; 1998: 25,098; 
1999: 27,867; 2000: 28,442; 2001: 31,935; 2002: 27,317; 2003: 24,047; 
2004: 19,059; 2005: 15,552.

State: Oklahoma; Number of loans: 1996: 8,611; 1997: 8,712; 1998: 
10,864; 1999: 11,274; 2000: 9,403; 2001: 10,308; 2002: 9,205; 2003: 
9,232; 2004: 7,554; 2005: 7,046.

State: Oregon; Number of loans: 1996: 4,869; 1997: 5,685; 1998: 5,569; 
1999: 7,213; 2000: 7,353; 2001: 8,794; 2002: 7,338; 2003: 6,311; 2004: 
3,747; 2005: 2,211.

State: Pennsylvania; Number of loans: 1996: 17,466; 1997: 19,698; 1998: 
20,623; 1999: 22,761; 2000: 22,384; 2001: 24,285; 2002: 19,799; 2003: 
15,820; 2004: 11,812; 2005: 9,266.

State: Rhode Island; Number of loans: 1996: 2,104; 1997: 2,494; 1998: 
2,705; 1999: 3,315; 2000: 3,069; 2001: 3,085; 2002: 2,466; 2003: 1,743; 
2004: 1,086; 2005: 481.

State: South Carolina; Number of loans: 1996: 4,338; 1997: 4,368; 1998: 
3,610; 1999: 5,058; 2000: 5,538; 2001: 6,081; 2002: 5,189; 2003: 5,105; 
2004: 4,793; 2005: 3,733.

State: South Dakota; Number of loans: 1996: 1,249; 1997: 1,467; 1998: 
1,632; 1999: 1,619; 2000: 1,416; 2001: 1,553; 2002: 1,400; 2003: 1,456; 
2004: 1,290; 2005: 888.

State: Tennessee; Number of loans: 1996: 18,026; 1997: 17,125; 1998: 
17,163; 1999: 18,547; 2000: 17,554; 2001: 19,305; 2002: 16,283; 2003: 
15,291; 2004: 12,623; 2005: 10,088.

State: Texas; Number of loans: 1996: 47,836; 1997: 49,485; 1998: 
58,722; 1999: 66,753; 2000: 66,412; 2001: 73,528; 2002: 69,465; 2003: 
64,823; 2004: 58,715; 2005: 45,779.

State: Utah; Number of loans: 1996: 8,348; 1997: 8,313; 1998: 7,119; 
1999: 9,230; 2000: 10,074; 2001: 11,281; 2002: 9,782; 2003: 10,034; 
2004: 8,538; 2005: 6,501.

State: Vermont; Number of loans: 1996: 176; 1997: 355; 1998: 373; 1999: 
425; 2000: 436; 2001: 488; 2002: 289; 2003: 280; 2004: 218; 2005: 145.

State: Virginia; Number of loans: 1996: 21,282; 1997: 22,184; 1998: 
24,346; 1999: 27,480; 2000: 27,966; 2001: 29,486; 2002: 23,927; 2003: 
18,576; 2004: 11,300; 2005: 6,496.

State: Washington; Number of loans: 1996: 11,843; 1997: 14,672; 1998: 
12,553; 1999: 15,840; 2000: 15,030; 2001: 17,740; 2002: 15,726; 2003: 
14,553; 2004: 8,995; 2005: 5,298.

State: West Virginia; Number of loans: 1996: 983; 1997: 922; 1998: 
1,150; 1999: 1,292; 2000: 1,466; 2001: 1,821; 2002: 1,736; 2003: 1,338; 
2004: 1,273; 2005: 1,188.

State: Wisconsin; Number of loans: 1996: 2,774; 1997: 3,741; 1998: 
3,642; 1999: 4,487; 2000: 4,425; 2001: 5,847; 2002: 5,233; 2003: 4,526; 
2004: 3,659; 2005: 3,347.

State: Wyoming; Number of loans: 1996: 896; 1997: 1,141; 1998: 1,128; 
1999: 1,153; 2000: 915; 2001: 988; 2002: 822; 2003: 746; 2004: 713; 
2005: 611.

State: Total; Number of loans: 1996: 582,781; 1997: 637,354; 1998: 
675,737; 1999: 774,259; 2000: 737,914; 2001: 776,380; 2002: 660,726; 
2003: 561,582; 2004: 413,754; 2005: 294,777.

Source: GAO analysis of HMDA data.

Note: We calculated market shares based on numbers of loans and, to the 
extent possible, excluded piggyback loans.

[End of table]

Table 3: Market Shares for Home Purchase Loans in Selected Submarkets, 
1996-2005:

Minority borrowers.

Market shares.

Minority borrowers: Market shares: Prime; 1996: 58.6%; 1997: 56.1%; 
1998: 56.5%; 1999: 55.9%; 2000: 56.5%; 2001: 57.1%; 2002: 60.2%; 2003: 
62.1%; 2004: 63.8%; 2005: 64.7%.

Minority borrowers: Market shares: Subprime; 1996:  2.0; 1997: 3.5; 
1998: 5.4; 1999: 6.8; 2000: 8.2; 2001: 7.2; 2002: 10.5; 2003: 16.1; 
2004: 22.1; 2005: 26.0.

Minority borrowers: Market shares: FHA; 1996: 31.6; 1997: 33.5; 1998: 
31.4; 1999: 32.0; 2000: 31.0; 2001: 31.1; 2002: 25.3; 2003: 18.4; 2004: 
11.3; 2005: 6.9.

Minority borrowers: Market shares: VA; 1996: 7.5; 1997: 6.5; 1998: 6.2; 
1999: 5.0; 2000: 4.2; 2001: 4.4; 2002: 3.7; 2003: 3.2; 2004: 2.6; 2005: 
2.3.

Minority borrowers: Market shares: RHS; 1996: 0.4; 1997: 0.4; 1998: 
0.4; 1999: 0.3; 2000: 0.2; 2001: 0.3; 2002: 0.3; 2003: 0.3; 2004: 0.2; 
2005: 0.2.

Minority borrowers: Market shares: GSE; 1996: 21.0; 1997: 19.8; 1998: 
23.3; 1999: 20.8; 2000: 22.5; 2001: 25.7; 2002: 31.7; 2003: 31.1; 2004: 
25.5; 2005: 20.3.

Minority borrowers: Number of loans:

Minority borrowers: Number of loans: Prime; 1996: 360,310; 1997: 
364,069; 1998: 415,696; 1999: 475,415; 2000: 486,901; 2001: 479,712; 
2002: 545,749; 2003: 627,808; 2004: 575,271; 2005: 753,007.

Minority borrowers: Number of loans: Subprime; 1996: 12,259; 1997: 
23,003; 1998: 40,079; 1999: 57,711; 2000: 70,455; 2001: 60,502; 2002: 
95,162; 2003: 162,540; 2004: 199,081; 2005: 302,296.

Minority borrowers: Number of loans: FHA; 1996: 193,975; 1997: 217,379; 
1998: 231,473; 1999: 272,433; 2000: 266,912; 2001: 261,088; 2002: 
229,657; 2003: 185,532; 2004: 101,724; 2005: 80,038.

Minority borrowers: Number of loans: VA; 1996: 46,008; 1997: 42,204; 
1998: 45,784; 1999: 42,716; 2000: 35,991; 2001: 36,832; 2002: 33,875; 
2003: 31,969; 2004: 23,097; 2005: 26,254.

Minority borrowers: Number of loans: RHS; 1996: 2,213; 1997: 2,552; 
1998: 3,149; 1999: 2,681; 2000: 1,982; 2001: 2,261; 2002: 2,485; 2003: 
2,943; 2004: 1,880; 2005: 2,046.

Minority borrowers: Number of loans: GSE; 1996: 129,130; 1997: 128,841; 
1998: 171,718; 1999: 176,680; 2000: 193,784; 2001: 216,195; 2002: 
287,896; 2003: 314,573; 2004: 229,635; 2005: 236,521.

Lower-income borrowers.

Market Shares.

Lower-income borrowers: Market Shares: Prime; 1996: 65.0%; 1997: 62.9%; 
1998: 64.4%; 1999: 63.0%; 2000: 62.4%; 2001: 62.3%; 2002: 65.5%; 2003: 
67.6%; 2004: 70.1%; 2005: 71.7%.

Lower-income borrowers: Market Shares: Subprime; 1996: 1.4; 1997: 2.5; 
1998: 3.9; 1999: 5.0; 2000: 6.7; 2001: 5.3; 2002: 6.8; 2003: 9.4; 2004: 
12.7; 2005: 15.0.

Lower-income borrowers: Market Shares: FHA; 1996: 26.0; 1997: 27.5; 
1998: 24.7; 1999: 26.0; 2000: 25.7; 2001: 27.1; 2002: 23.1; 2003: 18.6; 
2004: 13.4; 2005: 9.8.

Lower-income borrowers: Market Shares: VA; 1996: 6.9; 1997: 6.3; 1998: 
6.0; 1999: 5.2; 2000: 4.5; 2001: 4.7; 2002: 4.0; 2003: 3.6; 2004: 3.1; 
2005: 2.9.

Lower-income borrowers: Market Shares: RHS; 1996: 0.7; 1997: 0.8; 1998: 
0.9; 1999: 0.8; 2000: 0.6; 2001: 0.7; 2002: 0.6; 2003: 0.8; 2004: 0.7; 
2005: 0.7.

Lower-income borrowers: Market Shares: GSE; 1996: 23.8; 1997: 23.4; 
1998: 28.9; 1999: 26.7; 2000: 28.2; 2001: 32.2; 2002: 38.4; 2003: 38.5; 
2004: 35.9; 2005: 31.9.

Lower-income borrowers: Number of loans: 

Lower-income borrowers: Number of loans: Prime; 1996: 1,185,411; 1997: 
1,210,961; 1998: 1,469,715; 1999: 1,569,101; 2000: 1,486,038; 2001: 
1,498,980; 2002: 1,592,975; 2003: 1,749,681; 2004: 1,868,304; 2005: 
1,828,021.

Lower-income borrowers: Number of loans: Subprime; 1996: 25,490; 1997: 
47,337; 1998: 87,860; 1999: 125,000; 2000: 160,032; 2001: 126,461; 
2002: 165,128; 2003: 243,937; 2004: 338,614; 2005: 382,837.

Lower-income borrowers: Number of loans: FHA; 1996: 474,582; 1997: 
528,562; 1998: 564,317; 1999: 647,179; 2000: 612,534; 2001: 651,833; 
2002: 561,894; 2003: 480,480; 2004: 356,448; 2005: 248,863.

Lower-income borrowers: Number of loans: VA; 1996: 125,811; 1997: 
120,664; 1998: 137,619; 1999: 128,740; 2000: 107,526; 2001: 113,866; 
2002: 96,576; 2003: 92,749; 2004: 82,616; 2005: 73,229.

Lower-income borrowers: Number of loans: RHS; 1996: 12,576; 1997: 
16,207; 1998: 21,208; 1999: 18,836; 2000: 13,595; 2001: 15,657; 2002: 
14,896; 2003: 20,301; 2004: 18,484; 2005: 17,208.

Lower-income borrowers: Number of loans: GSE; 1996: 433,235; 1997: 
451,031; 1998: 659,117; 1999: 664,874; 2000: 670,876; 2001: 774,874; 
2002: 932,713; 2003: 996,578; 2004: 955,888; 2005: 812,593.

FHA-eligible loans: Market shares: 

FHA-eligible loans: Market shares: Prime; 1996: 66.9%; 1997: 65.2%; 
1998: 66.7%; 1999: 65.4%; 2000: 64.9%; 2001: 65.2%; 2002: 67.7%; 2003: 
68.8%; 2004: 71.0%; 2005: 72.5%.

FHA-eligible loans: Market shares: Subprime; 1996: 1.4; 1997: 2.6; 
1998: 4.0; 1999: 5.1; 2000: 7.0; 2001: 5.4; 2002: 7.0; 2003: 9.6; 2004: 
12.7; 2005: 15.2.

FHA-eligible loans: Market shares: FHA; 1996: 25.4; 1997: 26.2; 1998: 
23.3; 1999: 24.3; 2000: 23.6; 2001: 24.4; 2002: 21.1; 2003: 17.7; 2004: 
12.8; 2005: 9.2.

FHA-eligible loans: Market shares: VA; 1996: 5.7; 1997: 5.2; 1998: 5.2; 
1999: 4.6; 2000: 4.0; 2001: 4.4; 2002: 3.7; 2003: 3.2; 2004: 2.9; 2005: 
2.5.

FHA-eligible loans: Market shares: RHS; 1996: 0.6; 1997: 0.7; 1998: 
0.8; 1999: 0.6; 2000: 0.5; 2001: 0.5; 2002: 0.5; 2003: 0.7; 2004: 0.6; 
2005: 0.6.

FHA-eligible loans: Market shares: GSE; 1996: 24.0; 1997: 24.0; 1998: 
29.5; 1999: 27.0; 2000: 28.4; 2001: 33.4; 2002: 39.0; 2003: 38.5; 2004: 
37.4; 2005: 32.8.

FHA-eligible loans: Number of loans: 

FHA-eligible loans: Number of loans: Prime; 1996: 1,428,428; 1997: 
1,522,418; 1998: 1,872,251; 1999: 1,977,376; 2000: 1,870,710; 2001: 
2,038,154; 2002: 2,082,838; 2003: 2,093,435; 2004: 2,228,157; 2005: 
2,260,564.

FHA-eligible loans: Number of loans: Subprime; 1996: 30,685; 1997: 
60,067; 1998: 112,755; 1999: 152,900; 2000: 201,604; 2001: 170,390; 
2002: 214,870; 2003: 293,109; 2004: 397,608; 2005: 475,661.

FHA-eligible loans: Number of loans: FHA; 1996: 541,744; 1997: 612,373; 
1998: 653,048; 1999: 736,229; 2000: 680,059; 2001: 763,584; 2002: 
649,852; 2003: 537,877; 2004: 402,342; 2005: 286,470.

FHA-eligible loans: Number of loans: VA; 1996: 122,170; 1997: 121,717; 
1998: 146,434; 1999: 138,893; 2000: 115,075; 2001: 138,048; 2002: 
113,959; 2003: 97,958; 2004: 90,380; 2005: 79,195.

FHA-eligible loans: Number of loans: RHS; 1996: 12,685; 1997: 16,633; 
1998: 21,761; 1999: 19,169; 2000: 13,874; 2001: 16,620; 2002: 16,389; 
2003: 21,109; 2004: 19,151; 2005: 17,835.

FHA-eligible loans: Number of loans: GSE; 1996: 512,969; 1997: 560,485; 
1998: 826,462; 1999: 817,983; 2000: 819,521; 2001: 1,042,809; 2002: 
1,201,354; 2003: 1,171,130; 2004: 1,173,893; 2005: 1,023,192.

Investor properties: Market shares: 

Investor properties: Market shares: Prime; 1996: 94.3%; 1997: 94.6%; 
1998: 93.7%; 1999: 94.9%; 2000: 95.4%; 2001: 94.3%; 2002: 95.5%; 2003: 
92.8%; 2004: 90.9%; 2005: 90.4%.

Investor properties: Market shares: Subprime; 1996: 2.6; 1997: 4.4; 
1998: 5.7; 1999: 4.7; 2000: 4.0; 2001: 3.7; 2002: 4.4; 2003: 7.1; 2004: 
9.1; 2005: 9.5.

Investor properties: Market shares: FHA; 1996: 2.8; 1997: 0.7; 1998: 
0.5; 1999: 0.4; 2000: 0.4; 2001: 1.4; 2002: 0.1; 2003: 0.1; 2004: 0.0; 
2005: 0.0.

Investor properties: Market shares: VA; 1996: 0.3; 1997: 0.3; 1998: 
0.1; 1999: 0.1; 2000: 0.1; 2001: 0.5; 2002: 0.0; 2003: 0.0; 2004: 0.0; 
2005: 0.0.

Investor properties: Market shares: RHS; 1996: 0.0; 1997: 0.0; 1998: 
0.0; 1999: 0.0; 2000: 0.0; 2001: 0.0; 2002: 0.0; 2003: 0.0; 2004: 0.0; 
2005: 0.0.

Investor properties: Market shares: GSE; 1996: 19.1; 1997: 21.6; 1998: 
26.7; 1999: 28.1; 2000: 34.8; 2001: 40.0; 2002: 45.9; 2003: 41.3; 2004: 
34.2; 2005: 29.2.

Investor properties: Number of loans: 

Investor properties: Number of loans: Prime; 1996: 369,504; 1997: 
446,786; 1998: 522,788; 1999: 595,192; 2000: 638,724; 2001: 698,132; 
2002: 845,224; 2003: 1,033,234; 2004: 1,355,352; 2005: 1,647,122.

Investor properties: Number of loans: Subprime; 1996: 10,128; 1997: 
20,922; 1998: 31,730; 1999: 29,176; 2000: 26,806; 2001: 27,420; 2002: 
38,740; 2003: 79,040; 2004: 135,134; 2005: 173,424.

Investor properties: Number of loans: FHA; 1996: 10,914; 1997: 3,324; 
1998: 2,704; 1999: 2,402; 2000: 2,876; 2001: 10,378; 2002: 618; 2003: 
936; 2004: 394; 2005: 230.

Investor properties: Number of loans: VA; 1996: 1,264; 1997: 1,302; 
1998: 760; 1999: 588; 2000: 958; 2001: 3,946; 2002: 402; 2003: 324; 
2004: 188; 2005: 192.

Investor properties: Number of loans: RHS; 1996: 104; 1997: 70; 1998: 
134; 1999: 76; 2000: 108; 2001: 66; 2002: 66; 2003: 54; 2004: 68; 2005: 
72.

Investor properties: Number of loans: GSE; 1996: 74,788; 1997: 102,140; 
1998: 149,234; 1999: 176,248; 2000: 233,034; 2001: 295,728; 2002: 
406,028; 2003: 459,400; 2004: 510,338; 2005: 532,204.

Source: GAO analysis of HMDA and HUD data.

Note: We calculated market shares based on numbers of loans and, to the 
extent possible, excluded piggyback loans. The prime, subprime, FHA, 
VA, and RHS market shares add to 100 percent (figures used in this 
table were rounded to the nearest tenth of a percent). The GSE market 
segment is primarily a subset of the prime market segment. Data for the 
GSEs do not include loans originated and purchased in different years 
or all of the loans sold to intermediaries before being purchased by 
the GSEs.

[End of table]

Table 4: Market Shares for Home Purchase and Refinance Loans, 1996- 
2005:

Prime; 1996: 78.0%; 1997: 74.4%; 1998: 80.1%; 1999: 75.2%; 2000: 71.8%; 
2001: 81.4%; 2002: 83.7%; 2003: 84.5%; 2004: 75.8%; 2005: 76.6%.

Subprime; 1996: 5.4; 1997: 9.3; 1998: 8.4; 1999: 10.9; 2000: 12.4; 
2001: 7.9; 2002: 8.5; 2003: 9.8; 2004: 18.0; 2005: 18.5.

FHA; 1996: 12.3; 1997: 12.5; 1998: 8.5; 1999: 11.0; 2000: 12.9; 2001: 
8.7; 2002: 6.3; 2003: 4.4; 2004: 4.7; 2005: 3.5.

VA; 1996: 4.0; 1997: 3.5; 1998: 2.7; 1999: 2.6; 2000: 2.7; 2001: 1.9; 
2002: 1.4; 2003: 1.2; 2004: 1.3; 2005: 1.2.

RHS; 1996: 0.3; 1997: 0.3; 1998: 0.2; 1999: 0.3; 2000: 0.2; 2001: 0.2; 
2002: 0.1; 2003: 0.1; 2004: 0.2; 2005: 0.2.

GSE; 1996: 28.9; 1997: 27.0; 1998: 38.4; 1999: 31.1; 2000: 26.9; 2001: 
40.3; 2002: 46.0; 2003: 49.9; 2004: 36.1; 2005: 30.1.

Source: GAO analysis of HMDA data.

Note: We calculated market shares based on numbers of loans and, to the 
extent possible, excluded piggyback loans. The prime, subprime, FHA, 
VA, and RHS market shares add to 100 percent. (figures used in this 
table were rounded to the nearest tenth of a percent). The GSE market 
segment is primarily a subset of the prime market segment. Data for the 
GSEs do not include loans originated and purchased in different years 
or all of the loans sold to intermediaries before being purchased by 
the GSEs.

[End of table]

Table 5: Market Shares for Refinance Loans, 1996-2005:

Prime; 1996: 85.7%; 1997: 78.3%; 1998: 85.4%; 1999: 79.5%; 2000: 73.1%; 
2001: 87.9%; 2002: 88.8%; 2003: 88.2%; 2004: 75.8%; 2005: 76.8%.

Subprime; 1996: 11.4; 1997: 19.2; 1998: 11.8; 1999: 18.2; 2000: 25.0; 
2001: 9.7; 2002: 9.4; 2003: 10.0; 2004: 22.6; 2005: 22.0.

FHA; 1996: 2.0; 1997: 1.8; 1998: 1.9; 1999: 1.9; 2000: 1.7; 2001: 2.0; 
2002: 1.4; 2003: 1.4; 2004: 1.3; 2005: 1.0.

VA; 1996: 0.9; 1997: 0.6; 1998: 0.9; 1999: 0.4; 2000: 0.2; 2001: 0.4; 
2002: 0.4; 2003: 0.5; 2004: 0.2; 2005: 0.2.

RHS; 1996: 0.1; 1997: 0.0; 1998: 0.0; 1999: 0.0; 2000: 0.0; 2001: 0.0; 
2002: 0.0; 2003: 0.0; 2004: 0.0; 2005: 0.0.

GSE; 1996: 32.2; 1997: 27.5; 1998: 42.5; 1999: 33.4; 2000: 20.8; 2001: 
43.5; 2002: 49.3; 2003: 54.1; 2004: 36.9; 2005: 29.9.

Source: GAO analysis of HMDA data.

Note: We calculated market shares based on numbers of loans and, to the 
extent possible, excluded piggyback loans. The prime, subprime, FHA, 
VA, and RHS market shares add to 100 percent (figures used in this 
table were rounded to the nearest tenth of a percent). The GSE market 
segment is primarily a subset of the prime market segment. Data for the 
GSEs do not include loans originated and purchased in different years 
or all of the loans sold to intermediaries before being purchased by 
the GSEs.

[End of table]

[End of section]

Appendix III: Data on Selected Borrower and Loan Characteristics for 
FHA, Prime, and Subprime Loans, 1996 through 2005:

This appendix contains the results of our analysis of Home Mortgage 
Disclosure Act (HMDA) and Single-Family Data Warehouse (SFDW) data, 
information from the Federal Housing Finance Board, and summary 
LoanPerformance data. Specifically, tables 6, 7, and 8 contain 
information on selected borrower and loan characteristics for Federal 
Housing Administration (FHA)-insured, prime, and subprime loans. For 
prime and subprime loans, data were not available from the sources we 
used for the entire period we examined (1996 through 2005).

Table 6: Selected FHA Borrower and Loan Characteristics, 1996-2005:

Percentage of loans to all minority borrowers[A]; 1996: 33.8%; 1997: 
34.8%; 1998: 35.3%; 1999: 36.9%; 2000: 38.7%; 2001: 36.6%; 2002: 37.2%; 
2003: 34.9%; 2004: 31.6%; 2005: 29.3%.

Percentage of loans to Hispanic borrowers[A]; 1996: 14.4%; 1997: 15.1%; 
1998: 15.8%; 1999: 16.5%; 2000: 17.6%; 2001: 17.5%; 2002: 18.0%; 2003: 
16.9%; 2004: 14.7%; 2005: 12.9%.

Percentage of loans to black borrowers[A]; 1996: 13.8%; 1997: 13.9%; 
1998: 13.6%; 1999: 14.0%; 2000: 14.8%; 2001: 13.3%; 2002: 13.2%; 2003: 
12.4%; 2004: 13.5%; 2005: 13.2%.

Percentage of loans to low-income borrowers[A]; 1996: 44.4%; 1997: 
47.0%; 1998: 48.5%; 1999: 49.0%; 2000: 48.1%; 2001: 50.0%; 2002: 53.4%; 
2003: 54.1%; 2004: 55.4%; 2005: 53.1%.

Percentage of loans to moderate-income borrowers[A]; 1996: 37.1%; 1997: 
35.9%; 1998: 35.0%; 1999: 34.6%; 2000: 34.9%; 2001: 33.9%; 2002: 31.6%; 
2003: 31.4%; 2004: 30.7%; 2005: 31.3%.

Average loan amount[A]; 1996: $85,683; 1997: $88,559; 1998: $91,279; 
1999: $100,095; 2000: $104,406; 2001: $111,720; 2002: $117,796; 2003: 
$123,334; 2004: $122,840; 2005: $123,197.

Average borrower credit score[B]; 1996: ; 1997: 660; 1998: 662; 1999: 
653; 2000: 639; 2001: 647; 2002: 645; 2003: 647; 2004: 640; 2005: 640.

Average initial interest rate (ARMs)[B]; 1996: 6.6%; 1997: 6.4%; 1998: 
6.0%; 1999: 6.3%; 2000: 7.1%; 2001: 5.7%; 2002: 5.2%; 2003: 4.3%; 2004: 
4.5%; 2005: 4.9%.

Average interest rate (fixed-rate mortgages)[B]; 1996: 7.9%; 1997: 
7.8%; 1998: 7.2%; 1999: 7.5%; 2000: 8.3%; 2001: 7.3%; 2002: 6.9%; 2003: 
6.0%; 2004: 6.1%; 2005: 5.9%.

Percentage of first liens that are ARMs[B]; 1996: 25.5%; 1997: 32.3%; 
1998: 6.4%; 1999: 6.6%; 2000: 7.8%; 2001: 2.9%; 2002: 8.5%; 2003: 7.1%; 
2004: 12.0%; 2005: 7.6%.

Percentage of first liens with prepayment penalties[A]; 1996: 0%; 1997: 
0%; 1998: 0%; 1999: 0%; 2000: 0%; 2001: 0%; 2002: 0%; 2003: 0%; 2004: 
0%; 2005: 0%.

Source: GAO analysis of HMDA and HUD data.

[A] Data from HMDA.

[B] Data from SFDW.

Note: FHA does not allow prepayment penalties on the loans it insures.

[End of table]

Table 7: Selected Prime Borrower and Loan Characteristics, 1996-2005:

Percentage of loans to all minority borrowers[A]; 1996: 16.4%; 1997: 
16.3%; 1998: 15.9%; 1999: 17.7%; 2000: 19.4%; 2001: 19.4%; 2002: 21.2%; 
2003: 21.7%; 2004: 21.5%; 2005: 23.9%.

Percentage of loans to Hispanic borrowers[A]; 1996: 4.8%; 1997: 4.5%; 
1998: 4.5%; 1999: 5.1%; 2000: 6.0%; 2001: 6.5%; 2002: 7.1%; 2003: 7.5%; 
2004: 8.5%; 2005: 10.2%.

Percentage of loans to black borrowers[A]; 1996: 4.6%; 1997: 4.6%; 
1998: 4.3%; 1999: 4.4%; 2000: 4.5%; 2001: 4.0%; 2002: 4.1%; 2003: 4.6%; 
2004: 5.0%; 2005: 5.8%.

Percentage of loans to low-income borrowers[A]; 1996: 25.0%; 1997: 
25.0%; 1998: 25.7%; 1999: 27.5%; 2000: 26.7%; 2001: 26.3%; 2002: 27.5%; 
2003: 28.1%; 2004: 28.0%; 2005: 25.5%.

Percentage of loans to moderate-income borrowers[A]; 1996: 27.2%; 1997: 
26.7%; 1998: 26.9%; 1999: 26.3%; 2000: 25.9%; 2001: 26.2%; 2002: 26.9%; 
2003: 27.0%; 2004: 26.9%; 2005: 25.9%.

Average loan amount[A]; 1996: $114,315; 1997: $120,439; 1998: $127,858; 
1999: $137,545; 2000: $147,814; 2001: $158,335; 2002: $178,201; 2003: 
$187,080; 2004: $212,528; 2005: $235,258.

Average borrower credit score[B]; 1996: ; 1997: ; 1998: ; 1999: ; 2000: 
; 2001: ; 2002: 716; 2003: 719; 2004: 721; 2005: 723.

Average interest rate at origination (ARMs)[C]; 1996: 6.9%; 1997: 6.8%; 
1998: 6.4%; 1999: 6.5%; 2000: 7.0%; 2001: 6.3%; 2002: 5.6%; 2003: 5.0%; 
2004: 5.2%; 2005: 5.5%.

Average interest rate (fixed-rate loans)[C]; 1996: 7.8%; 1997: 7.7%; 
1998: 7.1%; 1999: 7.3%; 2000: 8.1%; 2001: 7.0%; 2002: 6.7%; 2003: 5.8%; 
2004: 6.0%; 2005: 6.0%.

Percentage of first-liens that are ARMs[D]; 1996: ; 1997: ; 1998: ; 
1999: ; 2000: ; 2001: ; 2002: 13.1%; 2003: 11.8%; 2004: 24.5%; 2005: 
22.5%.

Percentage of first-liens with prepayment penalties[D]; 1996: ; 1997: 
; 1998: ; 1999: ; 2000: ; 2001: ; 2002: 0.5%; 2003: 0.3%; 2004: 4.0%; 
2005: 6.0%.

Source: GAO analysis of HMDA data; information from Freddie Mac, Fannie 
Mae, and the Federal Housing Finance Board; and FHA-provided summaries 
of information in LoanPerformance's TrueStandings Servicing prime 
database.

[A] Data from HMDA.

[B] Data from Freddie Mac and Fannie Mae.

[C] Data from the Federal Housing Finance Board.

[D] Data from FHA-provided summaries of information in 
LoanPerformance's TrueStandings Servicing prime database.

[End of table]

Table 8: Selected Subprime Borrower and Loan Characteristics, 1996- 
2005:

Percentage of loans to all minority borrowers[A]; 1996: 27.8%; 1997: 
30.5%; 1998: 33.2%; 1999: 39.6%; 2000: 36.5%; 2001: 36.0%; 2002: 42.2%; 
2003: 47.2%; 2004: 47.2%; 2005: 53.5%.

Percentage of loans to Hispanic borrowers[A]; 1996: 7.7%; 1997: 8.4%; 
1998: 9.1%; 1999: 10.1%; 2000: 10.2%; 2001: 11.9%; 2002: 17.1%; 2003: 
20.9%; 2004: 23.0%; 2005: 28.4%.

Percentage of loans to black borrowers[A]; 1996: 9.3%; 1997: 12.8%; 
1998: 15.9%; 1999: 17.7%; 2000: 17.1%; 2001: 16.6%; 2002: 15.6%; 2003: 
15.4%; 2004: 17.5%; 2005: 18.6%.

Percentage of loans to low-income borrowers[A]; 1996: 24.5%; 1997: 
27.5%; 1998: 32.3%; 1999: 40.0%; 2000: 40.1%; 2001: 33.9%; 2002: 31.8%; 
2003: 29.9%; 2004: 30.9%; 2005: 27.1%.

Percentage of loans to moderate-income borrowers[A]; 1996: 27.8%; 1997: 
27.7%; 1998: 29.0%; 1999: 28.8%; 2000: 28.0%; 2001: 29.4%; 2002: 30.5%; 
2003: 31.5%; 2004: 31.8%; 2005: 29.6%.

Average loan amount[A]; 1996: $122,478; 1997: $118,189; 1998: $110,638; 
1999: $101,337; 2000: $94,758; 2001: $117,110; 2002: $150,050; 2003: 
$178,049; 2004: $204,234; 2005: $233,901.

Average borrower credit score[B]; 1996: ; 1997: ; 1998: ; 1999: ; 2000: 
; 2001: ; 2002: 611; 2003: 620; 2004: 622; 2005: 622.

Average interest rate at origination (ARMs)[C]; 1996: 8.7%; 1997: 9.5%; 
1998: 9.7%; 1999: 9.9%; 2000: 10.6%; 2001: 9.6%; 2002: 8.5%; 2003: 
7.5%; 2004: 6.9%; 2005: .

Average interest rate (fixed-rate loans)[C]; 1996: 10.1%; 1997: 10.0%; 
1998: 9.6%; 1999: 10.4%; 2000: 11.3%; 2001: 9.8%; 2002: 8.6%; 2003: 
7.5%; 2004: 7.3%; 2005: .

Percentage of first liens that are ARMs[C]; 1996: ; 1997: ; 1998: ; 
1999: ; 2000: ; 2001: ; 2002: 67.6%; 2003: 62.3%; 2004: 71.9%; 2005: 
72.6%.

Percentage of first liens with prepayment penalties[C]; 1996: ; 1997: 
; 1998: ; 1999: ; 2000: ; 2001: ; 2002: 64.1%; 2003: 61.6%; 2004: 
59.9%; 2005: 66.2%.

Source: GAO analysis of HMDA data, information from UBS, and data from 
the Federal Reserve Bank of St. Louis.

[A] Data from HMDA.

[B] Data from UBS Mortgage Strategist (November 29, 2005). UBS analyzed 
data from LoanPerformance's TrueStandings Securities subprime database.

[C] Data from "The Evolution of Subprime Lending," by Anthony 
Pennington-Cross and Souphala Chomsisengphet, Federal Reserve Bank of 
St. Louis Review, January/February 2006, Vol. 88 (No. 1), pp. 42, 44, 
50, 53. The paper presents analysis of data from LoanPerformance's 
TrueStandings Securities subprime database. This database consists 
primarily of the least risky (A-) grade of subprime loans. Therefore, 
the information we cite from the paper, including average interest 
rates, is not representative of riskier grades of subprime loans. The 
analysis is reprinted with the permission of the Federal Reserve Bank 
of St. Louis.

[End of table]

[End of section]

Appendix IV: Comments from the Department of Housing and Urban 
Development:

[See PDF for image]

[End of figure]

U.S. Department Of Housing And Urban Development: Washington, DC 20410-
8000: 

Assistant Secretary For Housing-: Federal Housing Commissioner:

JUN - 8 2007:

Mr. William B. Shear: 
Director:
Financial Markets and Community Investments: United States Government 
Accountability Office: 441 G Street, NW:
Washington, DC 20548:

Dear Mr. Shear:

Thank you for the opportunity to comment on the Government 
Accountability Office (GAO) report entitled, "Federal Housing 
Administration: Decline in the Agency's Market Share Was Associated 
with Product and Process Development of Other Mortgage Market 
Participants" (GAO-07-645). I would like to congratulate you on 
producing a straight-forward, well-researched report on the reasons for 
the recent decline in FHA's market share.

The report shows that while FHA predominantly serves lower-income and 
minority first-time homebuyers, more lower-income and minority 
homebuyers are being served by the conventional mortgage market. FHA 
welcomes this trend as a positive development compatible with its 
historical mission of demonstrating the potential for stable 
homeownership among riskier borrowers. The report also shows, however, 
that some of FHA's traditional borrowers are being enticed by low 
initial mortgage interest rate and affordable monthly payments into 
signing up for subprime mortgage products that have the potential to 
become substantially more costly, jeopardizing their ability to retain 
homeownership.

By pricing risk in a mortgage insurance premium instead of the mortgage 
interest rate, FHA gives borrowers access to market rates of interest, 
lowers their current and overall borrowering costs, and facilitates 
more transparent mortgage transactions. By balancing borrowers' 
downpayments with their credit profile, FHA will be able to offer a 
range of products to meet their financial needs and long tern goals. 
Some subprime borrowers facing mortgage interest rate resets, are 
currently refinancing with FHA to lower their borrowing costs. 
Unfortunately, many subprime borrowers will have insufficient cash or 
equity to refinance their mortgages. With FHA modernization, FHA could 
have served these borrowers.

FHA seeks to continue to offer viable mortgage alternatives for its 
traditional borrowers, making homeownership attainable at lower cost 
and lower risk to themselves. Given its historical experience with 
expanding homeownership, FHA is confident that, with additional 
flexibility, new mortgage insurance products, and risk-based pricing, 
it can continue to reach down the risk ladder and to demonstrate how 
lower-income and minority households can attain their dream of 
homeownership at lower risk to themselves and with manageable risk to 
FHA's insurance funds.

Thank you again for this excellent analysis of FHA's market share in 
recent years.

Sincerely,

Signed by: 

Brian D. Montgomery: 
Assistant Secretary for Housing-: Federal Housing Commissioner:

[End of section]

Appendix V: GAO Contact and Staff Acknowledgments:

GAO Contact:

William Shear (202) 512-8678 or shearw@gao.gov:

Acknowledgments:

In addition, Steve Westley (Assistant Director), Triana Bash, Steve 
Brown, John McGrail, Jeff Miller, Marc Molino, Barbara Roesmann, 
Richard Vagnoni, and Jim Vitarello made key contributions to this 
report.

FOOTNOTES

[1] Home purchase mortgages do not include mortgages for refinancing 
existing loans. 

[2] See GAO, Federal Housing Administration: Modernization Proposals 
Would Have Program and Budget Implications and Require Continued 
Improvements in Risk Management, GAO-07-708 (Washington, D.C.: June 29, 
2007). 

[3] There is no uniform definition across the lending industry for what 
characterizes a loan as subprime. Subprime loans are generally given to 
borrowers with credit scores that are below a certain threshold, but 
that threshold can vary according to the policies of the individual 
lender.

[4] Credit scores, which assign a numeric value to a borrower's credit 
history, have become a common tool for assessing loan applications. 

[5] The insurance or guarantees protect lenders against losses from 
loan defaults. The Department of Veterans Affairs and the Department of 
Agriculture administer the other two federal programs that guarantee 
single-family mortgages. Conventional loans with low down payments also 
may require mortgage insurance, which borrowers purchase from private 
companies. 

[6] We calculated market shares in terms of numbers of loans. We use 
the term "submarkets" to mean subsets of the home purchase mortgage 
market defined by various borrower, loan, and census tract 
characteristics. 

[7] TransUnion is one of the three main consumer credit reporting 
agencies. 

[8] LoanPerformance is a private firm that maintains databases 
containing detailed information submitted by participating lenders and 
third parties (e.g., securities issuers and dealers) on millions of 
mortgages. SFDW contains detailed information on the borrower and loan 
characteristics of the mortgages FHA insures. 

[9] We defined lower-income borrowers as those with incomes less than 
120 percent of the area median income.

[10] Pursuant to the Federal Credit Reform Act of 1990, HUD must 
annually estimate the credit subsidy costs for its loan insurance 
programs. Credit subsidy costs are the net present value of estimated 
payments it makes less the estimated amounts it receives, excluding 
administrative costs.

[11] Mortgage origination involves such functions as accepting loan 
applications and obtaining employment verifications and credit reports 
on the borrowers. It is distinct from mortgage underwriting, which 
refers to a risk analysis that uses information collected during the 
origination process to decide whether to approve a loan. 

[12] For purposes of the GSE goals, lower-incomes neighborhoods are 
those with a median income less than or equal to 90 percent of the area 
median income and high-minority neighborhoods are those with at least a 
30 percent minority population and a median income less than 120 
percent of the area median. Low-and very-low-income borrowers are 
defined as those with incomes less than 80 percent and 60 percent of 
the area median income, respectively. 

[13] During the 10-year period, VA and RHS had small market shares. 
VA's market share fell from 6 to 2 percent and RHS's market share 
remained at or near 0.4 percent. 

[14] From 1996 through 2005, FHA's share of the overall mortgage market 
(home purchase and refinance loans combined) declined from 12 to 4 
percent, while the prime share fell from 78 to 77 percent and the 
subprime share increased from 5 to 19 percent. Appendix II provides 
additional information on FHA and other market segments' share of the 
home purchase, refinance, and overall mortgage markets. 

[15] We defined low income as less than 80 percent of the median income 
for the census tract, moderate income as at least 80 percent but less 
than 120 percent, and upper income as 120 percent and above. 

[16] Census tracts are small, relatively permanent statistical 
subdivisions of a county. They usually have between 2,500 and 8,000 
persons and, when first delineated, are designed to be homogeneous with 
respect to population characteristics, economic status, and living 
conditions. The spatial size of census tracts varies widely depending 
on the density of settlement. 

[17] We took this approach because our analysis examined changes in 
FHA's market share during a 10-year period when the trend in FHA's 
share was downward. By using the 5 percent threshold, our analysis 
excluded census tracts where FHA's market share started and ended the 
period at zero and census tracts where FHA's market share was sporadic 
and on average very small near the beginning of the period.

[18] We defined low-, medium-, and high-minority census tracts as those 
with minority populations of less than 20 percent, 20 to 49 percent, 
and 50 percent or more, respectively. We defined low-, moderate-, and 
upper-income census tracts as those with median incomes that were less 
than 80 percent, at least 80 percent but less than 120 percent, and 120 
percent and above, respectively, of the median income for the 
associated metropolitan statistical area.

[19] We obtained credit score data from TransUnion's TrenData database. 
TransUnion depersonalized and aggregated the data from consumer credit 
reports. 

[20] For additional information about changes to FHA's administrative 
processes, see GAO-07-708. 

[21] X. An and R. Bostic,"GSE Activity, FHA Feedback and Implications 
of the Efficacy of the Affordable Housing Goals," forthcoming in 
Journal of Real Estate Finance and Economics.

[22] Interest-only loans allow borrowers to defer the principal 
payments for some period and hybrid ARMs allow borrowers to pay a lower 
interest rate for a specified time, usually between 2 and 5 years, 
before the loan resets to the fully indexed interest rate (i.e., a rate 
that is comprised of an adjustable rate index plus the lender's 
margin). Piggyback loans are simultaneous second mortgages that allow 
borrowers to make little or no down payment. No-and low-documentation 
loans allow for less detailed proof of income or assets than lenders 
traditionally require. 

[23] UBS Mortgage Strategist, 2005--Good or Bad for Vintage Subprime? 
(Jan. 31, 2006), 33. UBS analyzed data from LoanPerformance's 
TrueStandings Securities subprime database.

[24] Figures are from FHA-provided summaries of information from 
LoanPerformance's TrueStandings subprime database. 

[25] For additional information on FHA's scorecard, see GAO, Mortgage 
Financing: HUD Could Realize Additional Benefits from its Mortgage 
Scorecard, GAO-06-435 (Washington, D.C.: Apr. 13, 2006). 

[26] The term loan correspondent originally referred to lenders that 
originated, underwrote, and closed loans in their names (usually 
funding them with short-term lines of credit from banks) and then 
immediately sold the loans to other lenders. Today, the term is 
sometimes used synonymously with mortgage broker. Mortgage brokers 
originate loans for other lenders but seldom underwrite or close loans 
in their own names.

[27] FHA requires each of its loan correspondent firms (which include 
mortgage brokers) to have an annual audited financial statement and 
retain a minimum $63,000 net worth. 

[28] Testimony from Sandra L. Thompson, Director, Division of 
Supervision and Consumer Protection, Federal Deposit Insurance 
Corporation, entitled Mortgage Market Turmoil: Causes and Consequences, 
before the Committee on Banking, Housing and Urban Affairs U.S. Senate 
(March 22, 2007). 

[29] The fully indexed interest rate comprises an adjustable interest 
rate index, such as the Federal Home Loan Bank of San Francisco Cost of 
Funds Index, plus the lender's margin. 

[30] We based the loan amount and initial interest rate in this example 
on average values for subprime loans made in 2003. 

[31] FHA does not offer 2-year hybrid ARMs. 

[32] For additional information about how some nontraditional mortgage 
products create the potential for payment shock, see GAO, Alternative 
Mortgage Products: Impact on Defaults Remains Unclear, but Disclosure 
of Risks to Borrowers Could be Improved, GAO-06-1021 (Washington, D.C.: 
Sept. 19, 2006). 

[33] The default and foreclosure rates for loans reported in the 
December 31, 2006, MBA National Delinquency Survey are computed using 
the total number of loans as the base. The rapid growth in subprime 
loans in the last 2 years has increased the base for the default and 
foreclosure rate computations for these loans. All other things being 
equal, the growth in the base would lead to lower default and 
foreclosure rates. Given that many subprime loans are relatively new, 
the cumulative default and foreclosure rates for subprime loans are 
likely to worsen as the newer loans age. 

[34] First American CoreLogic, Inc., Mortgage Payment Reset: The Issue 
and the Impact (Santa Ana, Calif.: Mar. 19, 2007). 

[35] The payment-to-income ratio is a borrower's expected monthly 
housing expenses as a percentage of monthly income. The debt-to-income 
ratio is a borrower's expected monthly expenses on housing and other 
long-term debt as a percentage of monthly income.

[36] GAO, Mortgage Financing: Additional Actions Needed to Manage Risks 
of FHA-insured Loans with Down Payment Assistance, GAO-06-24 
(Washington, D.C.: Nov. 9, 2005). 

[37] HMDA requires lending institutions to collect and publicly 
disclose information about housing loans and applications for such 
loans, including the loan type and amount, property type, and borrower 
characteristics (such as ethnicity, race, sex, and income). These data 
are the most comprehensive source of information on mortgage lending. 

[38] FFIEC is a formal interagency body empowered to prescribe uniform 
principles, standards, and report forms for the federal examination of 
financial institutions by the Board of Governors of the Federal Reserve 
System, the Federal Deposit Insurance Corporation, the National Credit 
Union Administration, the Office of the Comptroller of the Currency, 
and the Federal Home Loan Bank Board, and to make recommendations to 
promote uniformity in the supervision of financial institutions. 

[39] More specifically, we identified pairs of loans with identical 
characteristics, including lender; property location; loan purpose; and 
applicant race, gender, and income. For each matched pair of loans, we 
designated (within certain parameters) the loan with the smaller dollar 
value as the piggyback loan. 

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