Get used to the FHA mortgage insurance life-of-the-loan premium

Head of FHA 'not considering changes'

The Federal Housing Administration said it is not considering any changes to the mortgage insurance life-of-the-loan policy despite recent calls to eliminate it.

Ed Golding, who serves as the head of the FHA, testified before a House Financial Services subcommittee on Thursday, shedding more light on what is happening in the government when it comes to mortgage insurance.

According to report from Compass Point Research & Trading, while Golding did not provide updated guidance regarding mortgage insurance premiums, he did address the FHA’s life-of-loan premium policy, which requires borrowers to pay annual mortgage insurance premiums for the life of the loan.

“I am actually not considering changes to the life-of-loan policy,” Golding said.  

Compass Point pointed out that this is the first explicit statement from the FHA reaffirming its life-of-loan premium policy, which is significant given persistent conjecture regarding FHA pricing.

In January 2013, the FHA announced it would require most borrowers to continue paying annual premiums for the life of their mortgage loan.

In 2001, the FHA cancelled required MIP on loans when the outstanding principal balance reached 78% of the original principal balance. However, FHA would still remain responsible for insuring 100% of the outstanding loan balance throughout the entire life of the loan.

As a result, the MMI Fund had foregone billions of dollars in premium revenue on mortgages endorsed from 2010 through 2012 because of this automatic cancellation policy, the FHA’s Office of Risk Management and Regulatory Affairs said.

Then in January 2015, making a major move in the housing industry, the Obama Administration directed, via executive action, the FHA to reduce annual mortgage insurance premiums by 50 basis points, from 1.35% to 0.85%.

Compass Point said this represented the first pricing cut since the housing crisis.

One the other side of the fence, the Compass Point report said that private mortgage insurers lost 4% to 5% of their share of the insured new home purchase mortgage market to the FHA following the 50bp cut to the annual premium in January 2015.

But despite the cut, the report said, “PMI’s still win approximately 10-15% of new volume from the FHA despite the FHA having a price advantage in certain borrower bands. One of the chief reasons that the PMIs win this business is because they offer cancelability once the LTV hits 78%, which reduces the mortgage payment.”

Golding’s explicit rejection of a life-of-loan pricing policy change is a positive for the private mortgage insurance industry since the ability to cancel mortgage insurance has a direct impact on borrow decision-making, the report said.

Back in November 2015, the FHA surprised some observers when it announced that its Mutual Mortgage Insurance Fund grew significantly in fiscal 2015, reaching its Congressionally mandated threshold of 2% well ahead of the FHA’s own projections.

The FHA’s fiscal year 2014 actuarial report projected that the MMI Fund would reach the Congressional mandated 2% level during fiscal 2016, but the FHA said that the independent actuarial analysis shows the MMI Fund’s capital ratio stands at 2.07%, well above the 2014 level of 0.41%.

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