Congress established FHA in 1934 under the National Housing Act (P.L. 73- 479) to broaden homeownership, protect and sustain lending institutions, and stimulate employment in the building industry. Over time, FHA came to play a major role in extending mortgage credit to first-time homebuyers and historically underserved borrowers such as minority and lower- income families. For example, in 2005, slightly less than 80 percent of FHA borrowers were first-time homebuyers, more than 80 percent had lower incomes, and approximately 30 percent were minorities. (See app. III for additional information on the borrower and loan characteristics of FHA- insured, prime, and subprime mortgages.) FHA currently insures a variety of mortgages for home purchases, construction and rehabilitation, and refinancing, with its most popular program—Section 203(b)—offering 15- and 30-year mortgages for single-family dwellings. Generally, borrowers are required to purchase mortgage insurance when the loan-to-value (LTV) ratio (the amount of the mortgage loan divided by the value of the home) exceeds 80 percent. FHA is a government mortgage insurer in a market that also includes private insurers. Private mortgage insurance policies provide lenders coverage on a portion (generally 20 to 30 percent) of the mortgage balance. However, borrowers who have difficulty meeting down-payment and credit score requirements for conventional loans may find it easier to qualify for a loan with FHA insurance, which covers 100 percent of the value of the loan. FHA-insured borrowers are required to make minimum cash investments of 3 percent, which may come from the borrowers’ own funds or from certain third- party sources. Borrowers are permitted to finance their mortgage insurance premiums and some closing costs, which can create an effective LTV ratio of close to 100 percent for some FHA-insured loans. In fiscal year 2006, the agency insured almost 426,000 mortgages, representing about $55 billion in mortgage insurance. Congress has set limits on the size of the loans that may be insured by FHA. The limit for an FHA-insured mortgage is 95 percent of the local median home price, not to exceed 87 percent or fall below 48 percent of the Freddie Mac conforming loan limit, which was $417,000 in 2006. Therefore, in 2006, FHA loan limits fell between a floor in low-cost areas of $200,160 and a ceiling in high-cost areas of $362,790. Eighty-two percent of counties nationwide had loan limits set at the low-cost floor, while 3 percent had limits set at the high-cost ceiling. The remaining 15 percent of counties had limits set between the floor and ceiling, based on local median house prices. FHA determines the expected cost of its insurance program, known as the credit subsidy cost, by estimating the program’s future performance. FHA’s mortgage insurance program is currently a negative subsidy program, meaning that the present value of estimated cash inflows to FHA’s Mutual Mortgage Insurance Fund (Fund) exceeds the present value of estimated cash outflows. The economic value, or net worth, of the Fund depends on the relative size of cash outflows and inflows over time. Cash flows out of the Fund for payments associated with claims on defaulted loans and refunds of up-front premiums on prepaid mortgages. To cover these outflows, FHA receives cash inflows from borrowers’ insurance premiums and net proceeds from recoveries on defaulted loans. If the Fund were to be exhausted, the U.S. Treasury would have to cover lenders’ claims directly. A number of different private-sector and government institutions participate in the mortgage market. Along with FHA, the Department of Veterans Affairs’ (VA) Loan Guaranty Service and the Department of Agriculture’s Rural Housing Service (RHS) administer federal government programs that insure or guarantee single-family mortgages made by private lenders. Private lenders that loan borrowers funds for home purchase and refinance mortgages often work with mortgage brokers, independent contractors that originate the loan products of multiple lenders. Fannie Mae and Freddie Mac are housing GSEs that purchase primarily prime conventional mortgages from lenders across the country, financing their purchases through borrowing or by issuing securities backed by the mortgages. Since 1994, HUD has set affordable housing goals for the housing GSEs and has adjusted the goals upward every few years. One goal is that at least 55 percent of the mortgages purchased by the GSEs must be made to families whose incomes are no greater than the area median income. The other two major goals concern the percentage of mortgages to borrowers residing in lower-income communities and certain high-minority neighborhoods (38 percent) and the percentage of borrowers with very low incomes and those with low incomes who live in low-income areas (25 percent). FHA’s share of the market for home purchase mortgages in terms of numbers of loans declined 13 percentage points from 1996 through 2005, while the prime share increased slightly and the subprime share grew 13 percentage points. Although the decline in FHA’s market share was broad- based, FHA experienced particularly sharp decreases in submarkets where it traditionally has had a strong presence, such as among minority and lower-income borrowers. Consistent with these trends, in geographic areas with higher concentrations of these borrowers, FHA lost substantial market share while the subprime share grew dramatically. The same pattern held true in areas with relatively low median credit scores and where median home prices rose to at least 75 percent of FHA’s loan limit during the 10-year period. From 1996 through 2005, FHA’s share of the home purchase mortgage market declined while the conventional share increased. As shown in figure 1, FHA’s market share fell from almost 19 percent (about 583,000 loans) in 1996 to about 6 percent (about 295,000 loans) in 2005, with almost all of the decline occurring after 2001. Although FHA’s market share has fluctuated over time, during the past two decades it has generally been over 10 percent. Over the 10-year period, the market share for conventional mortgages rose from almost 75 percent (about 2.3 million loans in 1996) to about 91 percent (about 4.2 million loans in 2005), with much of the increase due to growth in subprime lending. More specifically, prime market share increased from 73 percent to 76 percent overall, falling somewhat from 1996 through 2000 but then increasing about 5 percentage points after 2000. Subprime market share increased substantially over the 10-year period, from 2 percent to 15 percent, with most of the increase occurring after 2001 (growing from 5 percent in 2001 to 15 percent in 2005). From 1996 through 2005, the market share for the GSEs (essentially a subset of the conventional prime market) increased 3 percentage points overall (to roughly 30 percent in 2005), growing about 13 percentage points from 1996 through 2002 but falling 9 percentage points thereafter. From 1996 through 2005, FHA lost market share in certain key submarkets, especially among minority and lower-income borrowers, as well as among borrowers with mortgages within FHA’s loan limits. At the same time, the market share for conventional mortgages, particularly subprime loans, grew in these submarkets. This trend also held true in census tracts with high concentrations of low-income and minority households, relatively low median credit scores, and median home prices within FHA’s loan limits. Mirroring the trend in the overall home purchase mortgage market, FHA’s loss of market share in these submarkets primarily occurred after 2001. (See app. II for details on the trends in specific submarkets for each market segment) FHA traditionally has played a major role among minority borrowers. However, over the 10-year period, FHA’s share of this submarket fell substantially. Specifically, as shown in figure 2, FHA’s market share dropped 25 percentage points (from 32 to 7 percent) among minority borrowers, but declined most sharply among black and Hispanic borrowers (by 27 and 35 percentage points, respectively). FHA’s market share among white borrowers decreased from 16 percent to 7 percent during the 10-year period. In contrast to FHA, prime market share increased about 6 percentage points (from 59 to 65 percent) among minority borrowers and 5 percentage points (from almost 77 to just over 81 percent) among white borrowers from 1996 through 2005. Over the same period, subprime market share increased 24 percentage points (from 2 to 26 percent) among minorities, but especially among black and Hispanic borrowers (29 percentage points for each group). Subprime market share among white borrowers increased from 1 to 9 percent from 1996 through 2005. GSE market share among minority borrowers ultimately did not change substantially, beginning and ending the period at roughly 20 percent. From 1996 through 2002, GSE market share among minority borrowers increased 11 percentage points (to roughly 32 percent), but fell by about the same amount thereafter. GSE market share among white borrowers increased 7 percentage points over the 10-year period, to roughly 35 percent in 2005. Lower-income (i.e., low- and moderate-income) borrowers historically have relied heavily on FHA products, but FHA’s market share dropped in this submarket as well. From 1996 through 2005, FHA’s market share decreased among borrowers of all income levels, but, as shown in figure 3, particularly among lower-income borrowers, where FHA’s share declined 16 percentage points (from 26 percent to 10 percent). From 1996 through 2005, FHA’s market share among upper-income borrowers fell from 9 to 2 percent. Over the 10-year period, prime market share increased from 65 to 72 percent among lower-income borrowers and remained consistently high (above 80 percent) among upper-income borrowers.