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Barclays: FHA mortgage insurance premiums likely cut, again

Latest FHA report increases chances of further reduction

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While some industry observers are saying that now is not the time for the Federal Housing Administration to cut its mortgage insurance premiums again despite the FHA saying Monday that it reached its mandated capital reserve threshold, a new report from Barclays suggests that the FHA’s latest actuarial report actually increases the likelihood of a further cut to the FHA’s premiums.

The FHA announced Monday that its Mutual Mortgage Insurance Fund grew significantly in fiscal 2015, reaching its Congressionally mandated threshold of 2% well ahead of schedule, climbing from its 2014 level of 0.41% to 2.07% in 2015.

The increase surprised some in the industry, considering the 50 basis point cut in the FHA’s annual mortgage insurance premium prices announced in January by the Obama Administration.

The FHA’s own fiscal year 2014 actuarial report projected that the MMI Fund would reach the Congressional mandated 2% level during fiscal 2016, not during 2015.

The appearance of health for the FHA’s MMI Fund engendered reactions from throughout the housing industry, with some analysts, including Isaac Boltansky and Amy DeBone from Compass Point Research and Trading, placing the probability of a further FHA rate cut at 20%.

Others, including David Stevens, the president and CEO of the Mortgage Bankers Association, said that now isn’t the time for another rate cut, telling HousingWire that it would be better to wait until the MMI Fund builds up even more capital.

In a new report from Barclays, analysts Sandipan Deb and Anuj Jain write that the even though the MMI Fund hits its target, the underlying data suggests that the health of the MMI Fund is worse than it appears, but even despite that, the FHA is still more likely to cut the premiums again, citing the FHA’s positive spin on the report.

“(Department of Housing and Urban Development) officials are currently denying any plans of reducing MIPs, with HUD Secretary Julián Castro calling such talk ‘premature,’” Deb and Jain write.

“That said, the HUD has strongly highlighted the positive aspects of the report, especially the reserve ratio threshold being exceeded, and downplayed the deterioration in future economics,” they continue.

“Investors may recall that last year’s report showed a lower reserve ratio, and the HUD had indicated that it would target a reserve ratio of 4%, which would have required MIP levels to continue,” Deb and Jain write. “Yet, the MIP was cut sharply earlier this year. This report is being pitched as being more favorable, so the case for a cut is likely stronger.”

Deb and Jain write that the “headline number” of the FHA’s report does not reflect the “deterioration” in the FHA’s portfolio due to the premium cut announced in January.

According to the Barclays analysts, FHA’s 2015 portfolio is less profitable than its 2014 portfolio, and future growth of the MMI Fund has been curtailed by the lower mortgage insurance premiums.

But the analysts suggest that “benign economics” have boosted the performance of the FHA’s fund.

“Higher-than-expected forward rates helped the valuation of more recent positive (present value) vintages, which would have fared worse with lower rates,” they write.

“Based on changes in forwards, we had expected rate assumptions to be much lower than what was used in the analysis,” they continue. “The higher (home price appreciation) assumptions had an outsized effect on the current reserve ratio, more than negating the losses from lower interest rates and actually adding $2 billion to the $17 billion present value.”

The analysts go on to say that recent vintages continue to be valued at positive present value using current assumptions, and “even the 2015 vintage is valued at a 4.2% standalone capital ratio” despite lower premiums.

“A case could be made for the HUD not looking to turn profits on its business, especially into an election year and increased focus on credit availability,” Deb and Jain write. “That said, there is enough in the report that could be used to argue against any cut, especially the deterioration in future fund valuation with lower MIPs.”

Despite that, the analysts suggest that the likelihood of a future premium cut, especially for purchase or first-time homeowners, has likely increased.

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