Is the FHA about to cut mortgage insurance premiums again?

Compass Point analysts set odds of additional cut at 60%

Early last year, the Obama Administration shook up the housing world when it ordered the Federal Housing Administration to cut its annual mortgage insurance premiums by 50 basis points, from 1.35% to 0.85%.

The effect of the cut was widespread and significant, as the FHA’s mortgage insurance business exploded in 2015 and the FHA actually reached its Congressionally mandated threshold of 2% on its flagship Mutual Mortgage Insurance Fund years ahead of the FHA’s own predictions.

But is the FHA about to do it again? That’s the scuttlebutt around Washington, according to analysts from Compass Point Research & Trading, and the noise surrounding another cut is apparently getting louder.

In the wake of the January 2015 cut to the FHA’s premiums, many observers expected a negative effect on the FHA’s MMIF, considering that less money paid out in mortgage insurance premiums would theoretically lead to less money being funneled to the FHA’s flagship fund.

But that’s not what happened, as the FHA announced in November that the MMIF grew significantly in fiscal 2015, reaching its Congressionally mandated threshold of 2% well ahead of schedule, climbing from its 2014 level of 0.41% to 2.07% in 2015.

After the FHA released its 2015 actuarial report, opinions and analysis came in from all sides, with some calling for more cuts, while others argued that the FHA should wait to build up even more capital in its reserves.

In November, Barclays’ Sandipan Deb and Anuj Jain said that the “headline number” of the FHA’s report does not actually reflect the “deterioration” in the FHA’s portfolio due to the premium cut, but despite that, the FHA is still more likely to cut the premiums again, citing the FHA’s positive spin on the report.

Other analysts, including Compass Point’s Isaac Boltansky and Amy DeBone said in November that the probability of a further FHA rate cut was 20%, but according to a new report from those same analysts, the likelihood of a further cut to FHA premiums is significantly higher now than it was in November.

“While the policy argument for lowering FHA mortgage insurance premiums appears premature given the state of the MMIF and the FHA's current market share, conventional wisdom in D.C. has shifted toward expecting another rate cut announcement this year,” Boltansky writes in new Compass Point note.

According to Boltansky, after conversations with clients and other observers in and around Washington, Compass Point now places the probability of a further cut to FHA premiums this year at 60%, although Boltansky notes there is no consensus about what the structure of the potential cut will be or when exactly the announcement is coming.

There is some thought, Boltansky writes, that the announcement of an additional FHA premium cut would come before November’s Presidential election, in order to “ensure the maximum political benefit.”

Others argue that the next round of cuts will be announced after the FHA releases its 2016 actuarial report in mid-November, potentially mere days after the November 8 election.

As for the structure of the cut itself, Compass Point said that based on its conversations, it’s more likely that the FHA will cut its annual mortgage insurance premium by roughly 30 basis points, back to its pre-crisis level of 0.55%, which is exactly what the Community Home Lenders Association asked the FHA to do in October.

Compass Point noted that another potential cut could be a 50-basis point cut to the FHA’s up-front mortgage insurance premium, which would go into effect in 2017.

According to Compass Point, those cuts could be an either/or situation or both could be enacted simultaneously, cutting the FHA’s MI premiums even further.

One item that’s off the table, according to Compass Point, is any change to the FHA’s mortgage insurance life-of-the-loan policy, just as, Ed Golding, who serves as the head of the FHA, said earlier this year.

In February, Golding testified before a House Financial Services subcommittee and said that the FHA is “not considering” any changes to the life-of-loan policy.

But according to Compass Point, other changes to the FHA’s policies are certainly being considered and potentially coming soon.

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