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Community bankers call on FHA to lower mortgage insurance premiums

Costs threaten housing recovery, trade groups say

The mortgage finance industry wants the Federal Housing Administration to reduce its premiums, and they’re not being shy about letting the U.S. Department of Housing and Urban Development know about it.

The letters from the trade groups come in the immediate aftermath of FHA's annual Actuarial Report which showed the FHA to be making steady progress in strengthening FHA's finances. 

In open letters to HUD and the FHA, leaders from the Community Home Loan Association say the costs of doing FHA-insured mortgages is artificially high.

The Community Home Lenders Association also renewed its call for the FHA to lower the annual premiums it charges, in order to make FHA loans more affordable for lower and middle income homebuyers.  

"We commend the FHA for the work it has done to stabilize the finances of FHA,” Scott Olson, Executive Director of CHLA, said. “This makes it possible to balance this continuing progress in building up the FHA Fund with the objective of improving access to credit and increased homeownership opportunities for qualified homebuyers."

The CHLA says that this change would  "allow FHA to more fully meet its mission of affordable mortgage credit, while at the same time maintaining a steady buildup in the FHA MMIF Fund."

The community bankers, it should be said, are not the only ones to lobby for this change. The Mortgage Bankers Association are also asking for a break.

“MBA has been a consistent supporter of FHA throughout its 80-year history. We recognize the need for FHA to be on a sound financial footing so that it can support its mission of providing financing to first-time homebuyers and other underserved borrowers,” said Bill Cosgrove, chairman of the Mortgage Bankers Association. “At this time, however, MBA thinks mortgage insurance premiums are counterproductively high and recommends that they be reduced to better serve borrowers and meet FHA’s stated policy objectives.”

The FHA has a statutory mandate to recapitalize the Mutual Mortgage Insurance Fund in order to achieve a two percent capital ratio. That ratio currently stands at 0.41%.

The rate of recapitalization is affected by a tradeoff between the pricing of FHA insurance on one hand, and the corresponding volume of endorsements and their credit quality, on the other.

High insurance premiums tend to decrease volume and worsen credit quality, a dynamic that is exacerbated when there are other competitive sources of mortgage funds available in the market.

“…We recommend that FHA lower premium rates to reflect what has been learned from the most recent rounds of increases, namely that the gain in premium revenue was more than offset by a loss of volume and a drop in credit quality for new endorsements,” he said. “For the medium term, FHA should prioritize their objectives of strengthening the economic value of the fund, and increasing their support for first-time homebuyers in the market, allowing a longer time before reaching their target mix of business.”

The letter calls on FHA to reduce premiums as a means of fulfilling its mission of increasing affordability especially for first time and minority borrows.

CHLA first called for a reduction in FHA premiums last February, in a letter to OMB calling for a reduction in the annual premium level from 1.35% to .75%.  

This latest letter renews this call, and points out that the cost of this could be partially offset with an increase in upfront premiums, which do not have the same impact on affordability, and also with increased revenues resulting from more borrowers qualifying for an FHA loan.

In the letter, CHLA notes that an estimated 125,000 to 375,000 borrowers would have purchased a home in 2013 with an FHA loan except for FHA's recent hikes in annual premiums.

The letter also notes that FHA home purchase volume has fallen by more than 40% since 2010, and has experienced comparable declines in loans to African-Americans and Hispanic homebuyers. 

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