FHA’s mortgage share is on the decline. Nonetheless, that may turn out to be the good news – in a way. Since its peak market share of 39% in November, 2009, FHA’s portion has decreased to 20% as of the most recent reports.
When the mortgage market entered into the financial crisis, the government sponsored enterprises Fannie Mae and Freddie Mac tightened lending standards while private lenders bolted and mortgage insurers collapsed. That left FHA as just about the only option for low down payment mortgage loans – partly accounting for its rapid rise in market share at the time. Fast forward and market conditions have changed, including both housing and lending environments.
In the Insights blog, Sam Khater, CoreLogic’s Deputy Chief Economist, maintains that the Fed’s recent increase in interest rates has brought quite a bit of attention to the negative impact on the refinancing market due to that rate spike. However, there is an upside that may give borrowers the right incentive to refinance anyway – even if the rate is slightly higher.
Logically, homeowners might realize the value in cashing out some of the equity they likely accumulated in the 30% national increase in housing prices since 2013. Another vital reason to refinance could be that FHA purchase loan many homeowners were compelled to take due to restrictive lending conditions at the height of the housing crisis.
Just like conventional homebuyers, homeowners who purchased with FHA low down payment mortgage loans have also accumulated significant equity. It’s quite possible that they have enough accrued equity to reach the critical 20% level. If they are carrying an FHA loan, though, the policy change in 2013 leaves them with no option to eliminate their FHA insurance coverage, forcing them to continue paying an 85 to 135 basis point annual mortgage premium.
Increased national home prices, combined with the inability to eliminate mortgage insurance premiums, creates the perfect circumstance in which a savvy homeowner can save significant money – even with rising interest rates. In fact, according to Khater, “in-the-money FHA borrowers” are doing just that. They are using their accumulated equity to refinance into 80% or less loan-to-value conventional mortgages.
The most recent Mortgage Bankers Association (MBA) Weekly Mortgage Applications Survey shows that the Refinance Index increased 4% from the previous week, reaching a 45.6% activity share of total applications. Considering that 2.9 million borrowers entered into an FHA purchase mortgage after January 2013, signals are strong that the refinance market is filled with homeowners primed and positioned to refinance from an FHA loan into a Fannie Mae or Freddie Mac loan.