Dearth of First-Time Home Buyers Chills FHA Lending
WASHINGTON — Home builders and lenders know that the upper end of the housing market is the place to be these days.
Demand for home purchase loans above $417,000 is strong, while demand for lower balance loans is weak, according to Mike Fratantoni, the chief economist for the Mortgage Bankers Association.
"There is a real strong demarcation in the market," he said.
That is one reason builders appear to be catering to move-up buyers while paying little attention to first-time borrowers.
Overall, the entire MBA purchase mortgage application index is down 15% from a year ago. Yet applications for loans below $417,000 is where the real decline shows up.
This trend is impacting all government-backed lending and especially the Federal Housing Administration's single-family program. "FHA in particular seems to be doing even worst," said Frantantoni.
FHA depends on first time buyers for over 50% of its business. In January, FHA endorsed 45,800 single-family loans, including 26,500 loans for first-time buyers.
The weak first-time homebuyer market is part of the reason FHA has experienced such a large drop in purchase mortgage volume over the six-month period ending in January 2014.
Data from the Department of Housing and Urban Development shows that FHA endorsed 291,200 purchase loans in August 2013 through January 2014. That is a 15% decline from the 343,100 purchase loans FHA endorsed during the same six-month period a year ago (August 2012 through January 2013).
FHA also is being boxed out of housing markets due to a series of mortgage insurance premium over the past four years. In healthy housing markets where private mortgage insurance is available, homebuyers can get a better deal on a Fannie Mae or Freddie Mac conventional loan than a FHA loan if they have a 5% downpayment and a strong credit score.
Considering the higher FHA premiums, "it isn't surprising that they are trailing the market," Fratantoni said.
The loan guarantee program for the Department of Veterans Affairs is also taking market share from FHA.
MBA's latest survey of builder mortgage banking subsidiaries found that VA is trailing FHA by only three percentage points — 16% of new home buyers applied for a FHA-insured loan and 13% of home buyers applied for a VA-guaranteed loan. VA is particularly strong in southwest markets like Texas, which has been one of the best housing markets in the U.S.
The majority of applications (65%) were for Fannie and Freddie loans and 5% applications were for government backed Rural Housing Service loans.