Lending Through the Cycle: The Federal Housing Administration’s Evolving Risk in the Primary Market

Utilizing a sample of loan originations, the distribution of the market served by the Federal Housing Administration (FHA) and conventional lenders is modeled through this current cycle. Results indicate that FHA market shares in the early years of the observation period (2003 through 2006) are concentrated in zip codes with higher economic risk characteristics and obtained by high risk borrowers. FHA is forced to accept lower quality loans as competition from more nimble private lenders with lower access hurdles and more rapid processing expanded into markets traditionally served by FHA. Unexpectedly, the analysis also reveals that the distribution of FHA loans fails to exhibit a targeted racial bias toward neighborhoods with African American Concentration. Copyright International Atlantic Economic Society 2012