GAO: B&C Lending Grew at FHA's Expense

Subprime lending grew at the expense of the Federal Housing Administration's market share as minorities and lower-income homebuyers opted for teaser rates and other subprime features that are ultimately "more costly" than FHA loans, according to a Government Accountability Office report.The FHA's share of the home purchase market dropped from 31.6% in 1996 to 6.9% in 2005, while the conventional subprime market jumped from a 2.0% share to a 26.0% share. Now that subprime defaults and foreclosures are rising, the FHA could provide those borrowers with "lower-price and more sustainable mortgages," GAO says in the report to Congress. However, a second GAO report urges "caution" in allowing the FHA to offer zero-downpayment loans at a time of stagnant or declining housing prices. The GAO auditors recommended that Congress require the FHA to use a pilot program to test its zero-down products. The GAO also told Congress that legislation to increase the FHA's loan limit in high-cost areas would have boosted FHA loan production by 9%-10% in 2005. The GAO can be found online at http://www.gao.gov.