Citing the strength of the Mutual Mortgage Insurance Fund, the Federal Housing Administration in January cut its annual mortgage insurance premiums by 50 basis points, from 1.35% to 0.85%, but one group is now calling on the FHA to reduce its insurance premiums even further – to pre-crisis levels.
In a letter sent to the FHA’s acting commissioner, Ed Golding, the Community Home Lenders Association asks the FHA to drop its insurance premiums by another 30 basis points, to 0.55%.
In its letter, the CHLA said that the cut should take place when the FHA’s flagship fund hits its Congressionally mandated threshold of 2%, as the FHA’s fiscal year 2014 actuarial report estimated it would during fiscal 2016.
The CHLA’s push comes less than a month before the FHA is expected to release its 2015 actuarial report, which some industry observers predict will show that the FHA is either approaching or surpassing its 2% requirement.
But the 2014 version of the actuarial report, which predicted reaching the 2% threshold in 2016, was based on projections that did not include the FHA’s insurance premium cut from earlier this year.
In its letter, the CHLA noted that the FHA’s statute requires it to balance two operational goals for the FHA Fund: to minimize the default risk to the fund; and to meet the housing needs of the borrowers that the program is designed to serve.
“As it did when CHLA first called for the first FHA premium cut back in February 2014, CHLA pointed out FHA loans are performing strongly and reserves continue to build,” the CHLA said in its letter. “This enables FHA to cut premiums further when it hits the 2% benchmark, in order to fulfill both statutory objectives for the Fund.”
A recent report from the Mortgage Bankers Association showed that after the FHA’s share of purchase mortgage insurance steadily declined from 2010 until this year, the FHA’s share actually began to increase after the Obama administration directed the FHA to institute the cut from 1.35% to 0.85%.
The CHLA also cited those increases as a sign of the FHA fund’s health.
“As a result of the premium reduction, more qualified families were able to buy a home and existing homeowners enjoyed substantial savings through refinances,” the CHLA said in its letter. “Compared to the first six months of 2014, FHA 2015 purchase volume in the same period is 24% higher and total volume is up 50%. Through June 30, FHA had endorsed 735,000 loans, almost as many as in all of FY 2014.”
Despite those positive numbers, analysts from Compass Point Research & Trading recently said that reaching 2% in the FHA’s fund is not actually coming anytime soon.
“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),” said Compass Point’s 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,” Boltansky continued. “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.”
But the CHLA believes that further rate cut would the FHA’s reserves would actually grow with an additional rate cut.
“We would like to point out that even with such a step, FHA ‘upfront ‘premiums would still exceed levels in place before the 2008 housing crisis, particularly for lower FICO score borrowers,” the CHLA said. “Moreover, budget projections show that FHA reserves – and its Net Worth – will continue to grow substantially, even with the premium reduction CHLA is suggesting.”
Alternatively, if the 2% level is not reached in November, the CHLA said believes that FHA should use some interim method of tracking net worth, like quarterly or semi-annual evaluations, and should cut annual premiums to .55% when FHA’s net worth reaches 2%.
In its letter, the CHLA also called on the FHA to eliminate its “Life of Loan” policy premium – asking FHA to restore its longstanding policy in place as recently as 2013 in which premiums on a loan are eliminated when the loan pays down to 78% of the original loan balance.
This policy would help prevent FHA from losing good loans when borrowers refinance out of seasoned FHA loans, and it is more consistent with practices of private mortgage insurers, the CHLA said.