While many in the housing industry appear pleased by the Department of Housing and Urban Development’s decision to cut Federal Housing Administration mortgage insurance premiums later this month, the real question is whether the cuts, announced by a Democratic administration in its last days, will survive under the new Republican administration.
The team of President-elect Donald Trump has not commented on the FHA mortgage insurance cut, but reaction from a top Republican on Capitol Hill sheds light on how the Obama administration’s decision is being received by Republicans.
In a statement, House Financial Services Committee Chairman Jeb Hensarling, R-Texas, said late Monday that the cut to the annual mortgage insurance premium reduction puts the FHA in a precarious position.
“It seems the Obama administration’s parting gift to hardworking taxpayers is to put them at greater risk of footing the bill for yet another bailout,” Hensarling said.
As Hensarling notes, the FHA needed a $1.7 billion bailout in 2013, due to the significant shortages in the FHA’s Mutual Mortgage Insurance Fund, the FHA’s flagship fund.
Since then, the MMI Fund rebounded, and the Obama administration said that this latest cut is based on the strength of the MMI Fund.
“We made this decision based on the strength of the fund and the impact on borrowers. We’re confident that this decision is the right one,” outgoing HUD Secretary Julián Castro said this week on a call with reporters.
Castro added that the fund is “clearly in a much stronger position than it’s been in years,” and said that even with this latest cut, the fund is projected to continue its growth.
In 2015, the MMI Fund reached its Congressionally mandated threshold of 2% ahead of projections. It was also the first time the MMI Fund was at its mandated threshold since 2008.
The MMIF Fund wasn’t quite as strong as it appeared though, as much of the growth in the fund’s reserves in 2015 came from the performance of the FHA’s Home Equity Conversion Mortgage program, which is often volatile.
In a blog posted on HousingWire in 2015, former FHA Commissioner Carol Galante wrote that the HECM portfolio flipped back and forth from negative to positive economic values in every year from 2010 through 2015.
That trend held true in 2016 as well, as the HECM portfolio reversed from a net worth of $6.8 billion in 2015 to a net worth of -$7.7 billion in 2016.
Despite the decline in the HECM portfolio in 2016, the FHA’s MMI Fund grew again, thanks to huge growth in the forward mortgage portfolio.
In 2012, the FHA’s forward mortgage portfolio had a net worth of -$13.5 billion, rising to -$7.9 billion in 2013, and turning positive in 2014, when the net worth of the forward portfolio grew to $5.9 billion.
The net worth of the forward portfolio grew again in 2015 to $17 billion.
But in 2016, the net worth of the forward portfolio more than doubled, climbing it $35.3 billion.
That growth buoyed the FHA’s flagship fund even more in 2016, as the MMI Fund further surpassed its Congressionally mandated threshold of 2% and reached 2.32% in 2016.
Despite the fund’s healthier position, Hensarling said that the latest cut is dangerous and accused the Obama administration of “playing politics” with the move.
“Lowering premiums to below market rates now only puts the FHA in a more precarious financial condition,” Hensarling said.
“Playing politics with the FHA through cynical, surprise 11th hour rule changes is irresponsible and endangers the integrity and success of the FHA,” Hensarling continued.
“To be successful, the FHA must be fiscally sound, with a clearly defined mission, to ensure homeownership opportunities for creditworthy first-time homebuyers and low-income families,” Hensarling concluded. “Lowering FHA premiums now is counterproductive to achieving these goals and puts the U.S. taxpayer at greater risk.”
Despite Hensarling’s sentiments, Castro said that he has “no reason to believe” the latest premium cut will be “scaled back” by the incoming administration.
The release of the actuarial report that discloses the financial health of the MMI Fund came two weeks after the election, but at the time, Castro said that HUD had not yet been in contact with anyone from the Trump transition team.
When speaking with reporters this week, Castro said that in the months since then, conversations with the new administration have been taking place.
“I’m pleased to say that the transition team has been getting good briefings from the people inside the building here,” Castro said.
But Castro said that incoming administration was not involved in the decision to cut premiums, nor was it notified in advance.
“I cannot say that there was a briefing on this particular decision,” Castro said. “As you know, this is not public information, this is market sensitive information. And so my understanding is that they were given a heads up right before we went public with it this morning.”
Despite that, Castro said the transition is “proceeding well” and believes that the new administration won’t roll back the cut.
“(The premium cut) offers a good benefit to hardworking American families at a time when interest rates may well continue to go up, so I don’t believe that this is going to be scaled back,” Castro said, adding that he doesn’t anticipate the cut having a significant impact on the market or the FHA’s market share.
“Over the last several years, the FHA has played the role that it ought to play. What we see today is a market share that’s in a good place,” Castro said. “I don’t anticipate this having a tremendous impact on that market share. I don’t see reason for concern in that regard.”
Whether the Trump administration has concern about the FHA’s fund remains to be seen, but the housing industry will probably get a good reading of the Trump team’s tealeaves on Thursday, when Ben Carson, Trump’s choice to lead HUD, appears on Capitol Hill for his confirmation hearing.