share, which surged following the housing crisis and helped shore up the market,
is now in a steady decline. However, the
loans written during that period of high volume may become, in a round-about
way, good news for conventional mortgage refinancing.
CoreLogic's Deputy Chief Economist, writes in the company's Insights blog that
FHA's share of the purchase market skyrocketed from a low of 4 percent in
February 2007 to a peak of 39 percent in November 2009. As private lenders fled, mortgage insurers collapsed,
and the government sponsored enterprises Fannie Mae and Freddie Mac tightned
lending standards, FHA became about the only option for low downpayment loans.
Since that 2009
peak the FHA's purchase market share has declined to 20 percent (as of last
September). This is still 5 percentage
points above its late 1990s average.
Khater said the
recent rise in interest rates has focused a lot of attention on the negative
impact on the refinancing market. But, there
are reasons why borrowers might still want to refinance, even perhaps into a
higher rate. One reason might be to cash
out some of the equity accumulated in the 30 percent national increase in
prices since the beginning of 2013.
Another reason might be all of those FHA purchase loans taken at the
height of the housing crisis.
Homebuyers who bought with FHA
low-downpayment loans have also accumulated significant equity, perhaps enough
that they now have now reached the critical 20 percent level. Yet, a policy change in 2013 means that they
cannot dump their FHA insurance coverage and must keep paying an 85 to 135
basis point annual mortgage premium. This is a not-insignificant reason to
refinance into a conventional loan.
Khater says that is "exactly what
in-the-money FHA borrowers are doing."
They are taking their equity and using it to refinance into 80 percent or
less loan-to-value conventional mortgages.
In the first eight months of 2016, FHA to conventional refinances
accounted for roughly 8 percent of all refinances or about 20,000 loans per
month. Contrast this to 2010, when the rate was less
than 1 percent or less than 4,000 loans per month.
CoreLogic is currently forecasting
home prices to rise by 5 percent in 2017. Given that 2.9 million borrowers took
out an FHA purchase mortgage after January 2013, there could be a steady flow
of borrowers looking to refinance from FHA into a Fannie Mae or Freddie Mac loan
- perhaps as many as 250,000 in 2017.