The private sector cannot maintain the mortgage creditrnthrough economic downturns the way the public sector can.  FHA and private mortgage insurance (PMI) havernthe same purpose but technical differences that set them apart, especially thernfact that FHA is backed by the full faith and credit of the federal government.rn</p

PMI companies can and do become insolvent, file forrnbankruptcy or are seized by regulators. rnEven those that remain solvent must maintain acceptable levels ofrncapital.  While FHA is currently experiencingrnproblems with its capital ratio, it is not illiquid and does not face capitalrnconstraints.  The government guaranteerninsures that investors will still value FHA’s insurance.</p

Resiliency is especially important for housing financernbecause of its susceptibility to periods of boom and bust and because of therncircular nature of value.  The value of propertyrnwhich serves as collateral for credit is itself dependent on the availabilityrnof credit.  Price declines arernparticularly destabilizing because American homeowners are leveraged andrnmortgage debt will deepen housing downturns when homeowners are unable to refinancernto a lower interest rate or move into a new house, lowering marketrnliquidity.  A drop in home equityrnincreases the risk of foreclosure and any foreclosure further depresses thernvalue of nearby homes. </p

Conventional riskrnmanagement has difficulty with such systematic phenomena, where probabilitiesrnare not independent but correlated. In contrast, public insurance is extremelyrncapable of diversifying risk across time. </p

It is easy to see that FHA has a countercyclical role tornthat of PMI. Between 1990 and 2003, PMI accounted for roughly 12.6% of the entirernmortgage market by dollar volume and FHA just 6.7%.  Then subprime lenders with high loan-to-valuernratios and subordinate “piggy back” loans stole their market share.  As the housing market collapsed, privaternmortgage insurance briefly rallied, but losses constrained its ability to writernnew business. Since the beginning of 2009, private mortgage insurance hasrnaccounted for less than five percent of the market while FHA has accounted forrnalmost 18.6%.</p

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FHA’s is also countercyclical geographically.  Private mortgage insurers implementedrn”distressed area” policies, refusing to insure over 90 percent LTV loans inrnsome regions.  FHA does not vary itsrninsurance premiums by region, automatically stabilizing distressed areas.</p

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Between 2006 and 2009 FHA’s market share of owner‐occupiedrnhome purchase mortgages increased most in metropolitan areas that suffered thernlargest decrease in house prices.  ThoughrnFHA typically had a very minor role in those markets during the run‐up,rnthese were the markets most severely cut off from conventional credit when therncrisis hit, and therefore most benefited by FHA’s revival.  FHA has always stepped in when and wherernprivate lenders have retreated, preventing a downward spiral of house pricesrnand a reduction in credit availability.</p

A second purpose of FHA has been to serve borrowers andrnneighborhoods poorly served by the private sector. While subprime mortgagernlenders targeted these individuals and regions with disastrous results, FHA hasrnproven capable of supporting sustainable lending to them. </p

Despite higher defaults rates common in loans with high LTVrnratios, FHA has lowered its down payment requirements over the years from 20rnpercent to 5 percent while maintaining a relatively modest rate of claims. Thisrnis particularly important for first time homebuyers who accounted for 75rnpercent of all FHA endorsements in 201.  FHArnlending served 41percent of all first time homebuyers.  Since the subprime bubble burst FHA hasrnaccounted for 61 percent of purchase mortgages for Hispanic and black borrowersrnand these loans have been more sustainable than products in the conventionalrnmarket.</p

The third essential role of FHA over the years has been torntest and standardize new types of mortgages when the private sector is notrnwilling or able.  Many mortgage productsrnnow called “traditional” were pioneered by FHA. rnBefore the Great Depression, most mortgages were short‐term,rninterest‐only loans that had to be continually refinanced.  FHA popularized loans that are fullyrnamortizing and with first 20-year and then 30-year terms, which reduced thernrequired monthly payments and increased the acceptable LTV.  Fully underwritten 30‐year fixed‐raternmortgages have accounted for three‐fourths of FHA endorsements byrnvolume since FY2000 and FHA‐insured mortgages have performedrnsignificantly better than conventional subprime mortgages through the GreatrnRecession. </p

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The success of FHA led to the rebirth of a private mortgagerninsurance industry in 1957 and revolutionized the secondary mortgage market throughrnGovernment National Mortgage Association (“Ginnie Mae”) guaranties.  The experiences of FHA‐insuredrnmortgages also helped inform the development of credit scoring and automaticrnunderwriting.  </p

FHA’s Mutual Mortgage Insurance Fund has been self‐sustaining</bthrough borrower fees for 80 years. These premiums flow into a financingrnaccount equal to projected costs and a capital reserve account for any remainingrnfunds. The two accounts have over $30 billion in capital resources, which,rngiven the rate of losses of the last four quarters, is enough capital torncontinue paying claims for the next seven to ten years.</p