Last week the White House directed the Federal Housing Administration to reduce annual mortgage insurance premiums by 50 basis points, from 1.35% to 0.85%, and now Moody’s Investors Service says it will be a positive for Housing Finance Agencies.
“This 50-basis-point cut in premium rates is credit positive for state housing finance agency whole-loan programs because it will enhance financial performance through increased loan activity and likely lower delinquencies and defaults,” Moody’s says in a client note.
The new policy will allow HFAs, whose loans are often insured by the FHA, to originate more loans by raising the number of potential homebuyers who can afford mortgages and increasing existing borrowers’ cash available to cover their principal and interest payments.
The Obama administration expects the lower premium rates to save households an average of $900 per year. Assuming a fixed-rate mortgage of approximately $180,000, these savings would equal as much as 10% of a typical household’s monthly mortgage payment, thus making homeownership significantly more affordable.
“This is a boon for HFAs because borrowers’ additional spending power will increase HFAs’ market opportunity, allowing HFAs to attract more borrowers, originate more loans and bolster revenues,” Moody’s says. “By making homeownership more affordable, the new guideline will also help lower HFA mortgage delinquency rates, which, despite improving last year, remain higher than before the recession. As households save more on housing costs, borrowers will be less likely to default on their mortgage payments.”
Moody’s also says that the new policy will allow HFAs to increase the proportion of FHA-backed loans in their whole loan portfolios, with the lower premium rates enticing consumers to seek FHA insurance over private mortgage insurance (PMI).
“On average, approximately 46% of HFA loans are covered by FHA mortgage insurance. An increasingly greater proportion of FHA-insured loans in HFAs’ portfolios will bolster HFA performance by reducing losses on defaulted loans. Loans backed by PMI providers generally result in greater losses given the lower levels of coverage from PMI policies, which are typically 30%-35% of principal, versus nearly the nearly 100% coverage from FHA insurance,” Moody’s says.