Lending

It’s official: Obama to direct FHA to cut mortgage insurance premiums

Congressional pushback imminent

Obama housing in Arizona
The Obama Administration is directing, via executive action, the Federal Housing Administration to reduce annual mortgage insurance premiums by 50 basis points, from 1.35% to 0.85%.

“...(T)oday, the President announced a major new step that his Administration is taking to make mortgages more affordable and accessible for creditworthy families,” according to a statement from the White House.

The White House statement says that the typical first-time homebuyer, this reduction will translate into a $900 reduction in their annual mortgage payment.

“Existing homeowners who refinance into an FHA mortgage will see similar reductions to their mortgage payments as well,” the statement reads. “In total, this action will help millions of families save billions of dollars in mortgage payments in the coming years, helping to support the housing market recovery.”

While the White House says that the new premium level is fully consistent with the FHA’s commitment to continue strengthening its financial health through growing reserves, the Republicans in Congress have reservations that the Congressionally-mandated reserves are well funded.

Further, the action is certain to receive pushback in the new Republican-controlled Congress, which has to approve the cut.

Sterne Agee analyst Jay McCanless says that while many in the industry would welcome the cut, it won’t have as big an impact on housing as many expect.

“Such a change would be marginally beneficial for the average borrower, in our opinion, and consequently, we do not believe this news, if it proves true, is a catalyst for higher housing demand and higher earnings estimates,” McCanless says. “We Estimate the Riskiest Mortgage Borrowers Would Save about $25/month on their Mortgage Payment with Smaller Savings for More Creditworthy Borrowers. In a highly simplified model, we believe a borrower with a $100,000, 30-year mortgage required to pay the FHA's mortgage insurance could save approximately $25 at most on their monthly payment which is the net result of lower insurance premiums (known as MIP) and a higher mortgage rate.

“This savings will pull some marginal borrowers into homeownership, but it isn't enough, in our view, to assume single family housing demand increases above our current assumption of 15.0% single family starts growth in 2015,” McCanless says.

As to whether Congress will approve the change, McCanless is skeptical.

“We do not have an estimate of how long it might take Congress to approve such a change, and we would estimate the probabilities at 50/50 of it occurring. One media source indicated the President could take executive action to force the change, but we cannot verify that as accurate,” he writes. “Today's media speculation does not alter our view on this issue because we believe this change in the FHA insurance rate does not affect the risk calculus for originators.”

On Nov. 17, the FHA released its actuarial report on the Mutual Mortgage Insurance Fund for single-family programs, and while the health of the regulating agency improved, it still has a way to go with its finances.

The FHA boasted a $21 billion improvement since late 2012, after implementing a series of financing changes. The MMI Fund, which handles single-family programs, gained almost $6 billion in value in the past 12 months, printing now at $4.8 billion. Last year it fell short by more than $1.3 billion.

“Given that the FHA’s flagship fund – the Mutual Mortgage Insurance Fund  – is expected to remain below the Congressionally-mandated 2.0% threshold until October 2016, a decision to lower FHA premiums in 2015 would undoubtedly be met by considerable opposition from Congressional Republicans,” said Isaac Boltansky, analyst with Compass Point Research & Trading.

“Specifically, we believe that House Financial Services Chair (Jeb) Hensarling, R-Texas, and likely Senate Banking Committee Chair (Richard) Shelby, R-Ala., would publicly and aggressively attack a move to lower FHA premiums in advance of the MMIF clearing the 2.0% threshold,” Boltansky said in November.

The White House said that this step is part of Obama’s broader effort to expand responsible lending to creditworthy borrowers and increase access to sustainable rental housing for families not ready or wanting to buy a home.

The White House statement further says that in the coming months the Administration will be taking additional steps to cut red tape and clarify lending standards to build on the measures announced today. 

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