Markets Having Best Weathered Recession Dense with FHA Mortgages


It may seem obvious why some areas were hit harder than others when the housing bubble burst. Many markets were more saturated with subprime mortgages–particularly those in the Sunbelt- than other markets. But there is another layer to this onion you may not have peeled back yet; the role of the Federal Housing Authority (FHA) loan.

More FHA Mortgages, Less Foreclosure

Data is now suggesting government-sponsored mortgage insurance programs mitigated the effects of- and stimulated the recovery from- the great recession. In counties with high participation ratios in FHA loan programs were lower unemployment rates, higher home sales, higher home prices, lower mortgage delinquency rates and less foreclosure activity then in counties with less participation. These figures were applicable both soon after the 2009 peak of the financial crisis and six years later in 2014.

Unemployment rates had increased by 26% by the end of 2008 in counties that had low FHA loan participation. This compares to a mere 4% increase in unemployment rates in counties that had high FHA participation. And a year later, unemployment rates had increased by 106 and 58%, respectively.

FHA & Unemployment Rates

Recession recovery in counties with lower government involvement in mortgages were also sluggish. By the end of 2012, when unemployment rates had fallen, they still remained 30% higher in low FHA-share counties than in high FHA-share counties.

The discrepancies witnessed between counties with more FHA loans and those with fewer FHA loans the Federal Reserve credits to a few different components. These include lower government liquidity premiums, lower government credit-risk premiums and looser government mortgage-underwriting standards. The combination of these components, the Fed theorizes, may yield higher private-sector economic activity after a financial crisis.

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