As discussions around the future of the GSEs and possible reductions in mortgage insurance premiums at the Federal Housing Administration start to reach a boiling point, Patrick Sinks, president and CEO of private mortgage insurer MGIC, posted a blog on the company’s website to get one important factor straight in the discussion.
From the piece:
There is a great deal of discussion swirling around about the future of the GSEs, Fannie Mae and Freddie Mac. But other than some dated proposed legislation it seems no one is talking about the proper role for the FHA. This blog is not intended to get into the entirety of the policy debate around the FHA. Rather, this blog specifically addresses the need to identify the FHA’s role before considering any possible premium cut.
According to analysts from Compass Point Research & Trading, the noise surrounding another cut in mortgage insurance premiums is getting louder.
In November Compass Point’s Isaac Boltansky and Amy DeBone said 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.
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.
But before these rumored cuts can ever come into fruition, Sinks urges the industry to identify the FHA’s role fully before modifying the MIP structure.
These are the two Sinks mentions:
1. To serve as countercyclical capital particularly during times of regional or national economic stress
The housing market is well on its way to recovery. There is no need for government action in the form of providing countercyclical capital that is necessary at this point in time. There are many statistics that support that this recovery is well in place. In fact, over the past couple of years the various leaders of Housing and Urban Development (HUD) and the FHA have stated that with a recovery in mind they would hope that the FHA’s percent of the insurable residential mortgage market should return to its historical levels.
2. To facilitate homeownership for low and moderate income families
In regard to facilitating homeownership, the FHA’s mission is to assist underserved households to attain affordable homeownership. Presently, the FHA is straying from that mission. According to the 2014 Home Mortgage Disclosure Act data, 42% of FHA borrowers earn greater than the area median income (AMI). Additionally, the FHA claims that approximately 20% of their purchase volume comes from repeat buyers. These borrowers likely have private sector alternatives that would not further expose US taxpayers. The GSEs and the state HFAs ensure they are targeting the appropriate borrowers by enforcing AMI limits and/or first-time home buyer restrictions on their affordable programs. The FHA should do the same to ensure it stays squarely focused on the households with the greatest need.
Both points Sinks goes further into on the blog, which you can read into more here.
As Sinks wraps up, he notes:
If the FHA reduces premiums again, and uses the same 2015 premium reduction talking points, they will likely say they are providing access to homeownership to thousands of more borrowers, and that this premium reduction will not impact capital because of the additional premiums generated by new homeowners. That is a “make it up in volume” strategy, using taxpayer dollars. That is not sound housing policy.
Ultimately, he says:
There is no justifiable reason for the FHA to consider reducing it premiums without first addressing its role. The market is well served by the private sector during these better economic times. And further, doing so actually increases taxpayer exposure, a situation no one should favor.