Despite the Federal Housing Administration showing improvement in its financial house, it’s unlikely FHA mortgage insurance premiums will be going down in 2015.
On Monday, 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,” says Lauren Burk, 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,” Burk says.
Burk was on the money as not long after her client note, Hensarling publicly attacked the FHA for again failing to meet its capital ratio requirement, and said he would stand athwart any attempt to lower premiums.
“A year ago the FHA received its first-ever taxpayer-funded bailout and 12 months later the FHA has once again failed to meet its legally required minimum capital ratio. It’s been six years since the FHA was in compliance with the law,” Hensarling said. “The Obama administration predicts it will finally meet this requirement by 2016, but we’ve heard similar rosy predictions about FHA finances for years.
Some in Washington are now clamoring for the FHA to lower its annual mortgage insurance premiums. But until the FHA fulfills its statutory requirement, that should be a non-starter.”
Burk says any attempt to lower premiums faces an uphill battle. Just two years ago, the administration extended the charge to homeowners for the life of the loan.
“At this point, the likelihood of a FHA premium reduction is dependent on whether advocates and administration officials can effectively portray the tight state of mortgage credit and articulate a need for the FHA to more actively increase the flow of mortgage credit to lower credit borrowers,” she says. “Our sense is that FHA policymakers remain inclined to lower premiums and we continue to expect a premium reduction in mid-2015. We believe that the slower than expected recovery of the MMIF’s capital ratio, however, has shifted the political dynamics in favor of only a slight FHA premium reduction next year.”
Meanwhile, Hensarling used the FHA report as a case being made for fundamental overhaul of the FHA.
“Last year’s $1.7 billion taxpayer-funded bailout and FHA’s continued failure to meet its minimum capital ratio reinforce everything that many have said about FHA for some time – that it poses a high risk to taxpayers if it is not fundamentally reformed,” he said. “The American people clearly want to end the destructive cycle of boom, bust and bailout that Washington policies helped foster in the housing market. Regrettably the FHA, as it operates today, exacerbates taxpayers’ fears of future bailouts.
“The FHA has gone from backstopping the market to supplanting the market without a clear policy mission to serve first-time and low-income borrowers. The time for FHA reform is now,” Hensarling said.
Burk said the actuarial report offered some good news for private mortgage insurance.
“We believe that the weaker than expected FHA actuarial report should be viewed as a positive for the private mortgage insurance industry as the likelihood of FHA premium cuts in 2015 has undoubtedly lessened,” she says. “We believe that if FHA premiums remain static, and the FHA embraces a flattening of the LLPA grid or GSE loans, then the PMI industry can continue to expand its market share.”
Since the FHA’s most recent pricing model went into effect, the PMI industry’s share of the primary mortgage insurance market has grown from 34.5% to 42.0%, she says.
Conversely, the FHA’s share has dropped from 40.7% to 29.6% as of Q314. Ultimately, the most important policy issues impacting the PMIs will be the finalization of the Private Mortgage Insurance Eligibility Requirements, which is expected by the end of 2014 and the g-fee decision which observers expect by the first part of 2015.
“We estimate that 10-12% of FHA production could shift to the PMIs if the PMIs offer better financing than the FHA for >729 FICO loans. This shift would help to offset the loss in PMI market share that could occur if the FHA significantly lowers its MIPs,” Burk says. “Increased capital requirements related to PMIERs could prove relatively more burdensome for legacy PMI companies such as MGIC Investment Corp and Radian Guaranty.
“Alternatively, NMI Holdings and Essent Group Ltd. are likely to see a marginally higher benefit from market share gains from the FHA,” she says.