Urban Wire The FHA and the GSEs: Coordination to Increase Access to Credit
Ted Tozer, Laurie Goodman
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Fannie Mae and Freddie Mac (the government-sponsored enterprises, or GSEs) and the Federal Housing Administration (FHA) are trying to increase access to credit and affordability, as indicated by recent fee reductions. Although the evidence shows this is a step in the right direction, to truly expand homeownership, the GSEs and the FHA could explicitly coordinate their policies, focusing on the role each can play.

How the GSEs and the FHA work

Before the Great Recession, the FHA had a small market share consisting of fully documented loans with low credit scores and high loan-to-value (LTV) ratios, as the private-label securities market was willing to accept loans with little documentation. The GSEs did not do risk-based pricing—they priced all loans from a given originator the same, with the largest originators often getting substantially better prices than smaller originators.

In the aftermath of the financial crisis, the FHA raised its mortgage insurance premiums to shore up its finances, and the GSEs introduced and then expanded their risk-based pricing programs. Today, the GSEs continue to do risk-based pricing on their mortgages, while the FHA does not. GSE mortgages with LTV ratios over 80 percent require mortgage insurance; the private mortgage insurers have always done some risk-based pricing.

More recently, private mortgage insurance companies have moved from rate cards to model-based pricing, allowing for more granular risk-based pricing. Given these differences in pricing structure, the higher LTV ratio, and higher debt-to-income ratio, borrowers with lower credit scores tend to go to the FHA.

Among first-time homebuyers with LTV ratios above 90 percent, borrowers with lower credit scores disproportionately trend to the FHA; those with credit scores between 680 and 720 split, with some loans going to the FHA and others to the GSEs; and those with credit scores above 720 disproportionately go the GSEs.

FHA-GSE Borrower Split

First-time homebuyers with LTV ratios above 90 percent
Credit scores FHA GSE
<620 99.5% 0.5%
620-659 94.7% 5.3%
660-679 85.1% 14.9%
680-699 61.5% 38.5%
700-719 40.9% 59.1%
720-739 25.7% 74.3%
≥740 13.5% 86.5%

Source: Urban Institute calculations from eMBS data.
Notes: FHA = Federal Housing Administration; GSE = government-sponsored enterprise; LTV = loan-to-value.

When the GSEs or the FHA change their pricing, it shifts marginal buyers from one to the other. The GSEs recently waived their loan-level pricing adjustments for all borrowers earning less than 100 percent of area median income (or 120 percent in some high-cost areas). These changes, effective May 22, 2023, would have made GSE loans more attractive than FHA loans from a pricing point of view for certain borrowers. This will be mostly reversed with the FHA’s February 22, 2023, announcement of a 30 basis-point cut to mortgage insurance premiums.

How future cooperation could mean better access to credit for potential homebuyers

 The cuts make sense in light of both tight lending standards since the Great Financial Crisis, as well as the FHA’s Mutual Mortgage Insurance Fund now standing at 11 percent, many times higher than the 2 percent required minimum, suggesting there is room to cut fees without compromising the Fund. But there has been little analysis on how much the FHA and GSE cuts would expand overall access to credit.

Ensuring borrowers get the best pricing is important, but it’s perhaps even more important to increase the number of households that can qualify for mortgages and tap into the security and wealth-building power of homeownership. Pricing is not the only tool to do so; widening the credit box is another tool. The entities can work together to determine their strengths and identify policies and strategies to create more new homeowners.

The GSEs’ big comparative advantage is their technological prowess. The GSEs could expand the number of qualifying borrowers by harnessing big data, such as bank statement data, and make this an integral part of their qualification process. This would allow them to qualify borrowers that the FHA cannot.

The GSEs use bank statements to qualify borrowers who have not received an initial acceptance from their automated underwriting system, but one year of statement-verified on-time rental payments would allow the borrower to qualify. The GSEs go back to the originator, who asks the borrower for permission to access the information. If bank statements were built into the front end of the approval process (with consumer permission), the GSEs would be able to obtain a more holistic view of income.

Under current qualifying systems used by the GSEs and the FHA, not all income is captured. An Uber driver who sometimes works 5 hours a week and sometimes 20 hours a week will not get credit for their full income. Nor will a painter who is employed by a firm but also freelances or a teacher who tutors on the side.

In many multigenerational families, household members who are not on the mortgage may contribute to mortgage payments. Counting more of these household members’ income would allow more households to qualify for mortgages. Indeed, we see harnessing big data such as bank statement information as the true comparative advantage of the GSEs in the years to come.

The FHA’s strength is access to capital with a near-zero cost. In contrast, even in conservatorship, the GSEs price as if they need an almost-market return on their capital. The FHA can make loans at a reasonable cost to more risky borrowers where GSE pricing would not make sense.

To expand access to loans, the FHA can expand the number of its origination and servicing partners by working with lenders to make the program less bureaucratic and by making the standards that the originating and servicing partners are being held to more consistent through time.

For example, the large banks initially pulled back from FHA lending because of the reputational risk stemming from origination under the False Claims Act, and they have stayed out of the market because of concerns about the liability in FHA servicing, caused by uneven enforcement. Independent mortgage banks now make up 92 percent of FHA originations.

Coordination to expand access to credit

Explicit coordination between the FHA and the GSEs to allow for wider access to mortgage credit would hence allow more renters to become homeowners. In the past, there have been unilateral policy decisions based on the number of incremental loans to be insured or acquired by the entity making the change, even if the incremental increase in insurance or acquisition does not lead to an expansion of credit to marginalized families. We have, however, seen examples of cross-agency coordination in pursuit of a given goal, such as the Biden administration’s work on mortgage forbearance to prevent foreclosure

To determine whether future policy changes will meet those objectives, the organizations should assess the impact of any changes on the number of incremental borrowers that would gain access to credit. It could be that increasing the marginal probability of default rather than further price cuts would lead to more renters becoming homeowners and building generational wealth.


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Research Areas Housing finance
Tags Agency securitization Financial products and services Housing affordability Housing markets
Policy Centers Housing Finance Policy Center
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