The Federal Housing Administration’s (FHA) capital position is once again prompting calls to lower the mortgage insurance premium (MIP) to help borrowers facing higher mortgage interest rates. However, past cuts during seller’s markets have been wealth transfers to home sellers in the form of higher prices. As a result, they hurt rather than help most first-time buyers by increasing prices, thus canceling out much of the premium cut for FHA buyers and raising home prices for other buyers. They also expand taxpayer risk by drawing down the capital reserve fund.
The reason this policy doesn’t work is simple: In a tight housing market, demand-side subsidies increase purchasing power, driving home prices up without increasing homeownership since there aren’t any more homes to buy. These subsidies are also most appealing to marginal borrowers who gain an arbitrage opportunity by shifting from Government-Sponsored Enterprise (GSE)-backed loans to FHA, reshuffling beneficiaries rather than expanding the number of first-time buyers.
FHA cut its MIP in January 2015 by 50 basis points, creating an immediate reduction in monthly mortgage payments for FHA borrowers, but not other buyers. However, the additional buying power for FHA buyers in neighborhoods with 20 percent of more FHA presence allowed these buyers to set new, higher prices for all buyers. Our previous research shows that the cut resulted in faster home price appreciation in these neighborhoods by 2.5 percentage points compared to similar areas without such presence, thus disadvantaging GSE first-time buyers competing in these markets. As FHA became a better execution than the GSEs, it triggered an immediate rise in FHA’s market share.
Affordability similarly worsened following FHA’s smaller March 2023 cut, but the mechanism differed. Unlike 2015’s stable rate environment, the 2023 cut landed amid a sharp run-up in mortgage rates and ongoing recovery in FHA’s market share. These conditions amplified the policy’s distortionary effects: rather than broadening access, the cut supported substitution away from conventional lending, with FHA poaching marginal borrowers who, in a lower-rate environment, might have obtained GSE financing.
Figure 1. FHA and GSE (Fannie/Freddie) Purchase Loan Origination Share (Left Axis) and 30-Year Fixed Mortgage Rate (Right Axis)
This pattern of substitution largely reflects how borrowers adjust their financing choices in response to rising mortgage rates. Higher rates shift affordability constraints, increasing monthly payments for new borrowers and pushing many up against conventional debt-to-income (DTI) limits, which are typically capped at 45 percent and 50 percent with compensating factors. In this context of worsening affordability, FHA’s higher DTI limits of up to 57 percent make it much more attractive than other agencies, fueling its rising market share.
Evidence of poaching is further enforced by an uptick in higher-quality FHA borrowers. In May 2022, 45 percent of FHA purchase loans were to borrowers with FICO scores below 660, as compared with 14 percent to borrowers with FICO scores above 720. Today, FHA originates roughly equal shares of loans to its lowest- and highest-credit borrowers, with the share of high-FICO borrowers continuing to rise, though more slowly as rates began to stabilize and come down slightly from late 2023 until early 2026.
Figure 2: Share of FHA Purchase Loans by FICO Bucket
These findings suggest that future MIP cuts would have similar effects, especially for underserved borrowers. As higher rates continue pushing creditworthy borrowers toward FHA, additional cuts would improve pricing for higher-quality borrowers already capable of obtaining financing, accelerating substitution away from the GSEs and artificially propping up FHA’s footprint without expanding access. This borrower poaching is not benign—it shifts creditworthy borrowers into higher risk loans with greater DTIs, exposing them to greater default risk and taxpayers to greater potential losses.
Meanwhile, any affordability gains would be short-lived in today’s tight market, where another demand-side subsidy would simply further bid up already rising prices, especially in some strong Midwest and Northeast markets like Kansas City, MO and Cleveland, OH, although some markets where prices are declining might benefit from a demand boost. Under FHA’s one-size-fits-all policymaking, a cut intended to help struggling areas would simultaneously overstimulate those where prices are still climbing, worsening overall affordability. The losers would remain the borrowers MIP cuts are meant to serve—FHA’s traditional first-time buyer cohort who would find it harder to compete as more creditworthy GSE-type borrowers crowd into FHA’s market and affordability worsens.
The lesson from the past decade is that their impact depends critically on the broader market context. There are growing signals that today’s housing market may be nearing an inflection point, with late-cycle dynamics already in play. FHA delinquencies are on the rise, indicating that borrowers are under stress; DTI ratios are historically elevated; and the current housing market expansion has run uninterrupted since at least 2013. FHA should be building out the Mutual Mortgage Insurance Fund in preparation for a potential economic downturn, not drawing it down.
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