The Federal Housing Administration’s mid-November actuarial report is expected to provide some insight into its pricing policy options, according to a client note from Compass Point Research & Trading.
The FHA’s fiscal year 2014 actuarial report estimated that its flagship fund would hit the Congressionally mandated 2% threshold in fiscal 2016, but that assessment was made before the 50bps mortgage insurance premium reduction in January 2015.
“We believe the 2% capital estimate is likely to slip but we view FY17 as far more likely than FY18 given the actuarial impact of slight upticks in both FHA volume and credit quality following the MIP reduction (e.g. average credit scores increased by 4 points),” says Isaac Boltansky. “Therefore, we expect the mid-November actuarial report will show that the FHA’s financial health continues to improve but we do not believe that this will translate to further pricing reductions in 2016.
“Our sense is that the FHA is unlikely to materially alter its current pricing structure as policymakers appear content with its current market share and administration officials would prefer to avoid the political pushback that would come in the wake of another premium cut,” Boltansky says.
While a mortgage insurance premium reduction remains possible, he says his sense is that other FHA policy issues including the certification and claims proposals will draw attention away from pricing, meaning there’s only, in his view, a 20% chance that the FHA lowers MIPs in 2016.