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520 Dissenting Statement

Established in 1934, now a part of HUD and administered by the Federal
Housing Administrator (who is also the Assistant Secretary of Housing), FHA
insures 100 percent of an eligible mortgage. It was established to provide fi nancing
to people who could not meet the standards for a bank-originated conventional
loan. Th e loans it insured had a maximum LTV of 80 percent in 1934. Th is went to
139
95 percent in 1950, and 97 percent in 1961. With its maximum LTV remaining at
97 percent, FHA maintained average FICO scores for its borrowers just below 660
from 1996 to 2006. During this period, the average FICO score for a conventional
140
subprime borrower was somewhat lower. Beginning in 1993, shortly aft er Fannie
and Freddie were introduced as competitors, FHA began to increase its percentage
of loans with low downpayments. Th is had the predictable eff ect on its delinquency
rates, as shown in the fi gure below prepared by Edward Pinto with data from FHA,
the FDIC, and the MBA:
Figure 6.

Despite its reductions in required downpayments, FHA’s market share vis-a
vis the GSEs began to decline. According to GAO data, in 1996, FHA’s market
share among lower-income borrowers was 26 percent while the GSEs’ share was
23.8 percent. By 2005, FHA’s share was 9.8 percent, while the GSEs’ share was 31.9
percent. It appears that early on Fannie Mae deliberately targeted FHA borrowers
with its Community Homebuyer Program (CHBP). In a memorandum prepared
in 1993, Fannie’s Credit Policy group compared Fannie’s then-proposed CHBP
program to FHA’s requirements under its 1-to-4 family loan program (Section
203(b)) and showed that most of Fannie’s requirements were competitive or better.

139 Kerry D. Vandell, “FHA Restructuring Proposals: Alternatives and Implications,” Fannie Mae Housing
Policy Debate, vol. 6, Issue 2, 1995, pp. 308-309
140 GAO, “Federal Housing Administration: Decline in Agency’s Market Share Was Associated with
Product and Process Developments of Other Mortgage Market Participants,” GAO-07-645, June 2007,
pp. 42 and 44.