No FHA premium cut coming; Flagship insurance fund falls in 2017

Capital ratio still above Congressionally mandated threshold, but falls from 2016

The speculation that the Department of Housing and Urban Development would announce a cut to Federal Housing Administration mortgage insurance premiums appears to have been just that – speculation.

Despite some thought that the FHA may reinstate a previously suspended cut to its mortgage insurance premiums, HUD announced Wednesday that premiums will not be cut, due in part to the weaker-than-expected performance of the FHA’s flagship insurance fund, the Mutual Mortgage Insurance Fund.

The FHA announced Wednesday that the key figure in the health of the MMI Fund, its capital ratio, remained above the Congressionally mandated threshold of 2%, but declined in fiscal 2017 from where it was last year.

According to the FHA, the MMI Fund’s economic net worth fell $1.9 billion and the capital ratio declined from 2.35% last year to 2.09% this year.

The decline marks the first time in five years that the MMI Fund’s capital ratio decreased.

Last year, the MMI Fund reported its fourth straight year of growth, with much of the growth being driven by the FHA’s forward mortgage business, rather than its volatile reverse mortgage business as it had been in 2015.

In 2015, the MMI Fund finally reached its Congressionally mandated threshold of 2%, climbing back above that level for the first time since 2008.

That flew directly in the face of speculation that a 50 basis point-cut of the FHA annual mortgage insurance premiums, which the Obama administration announced in early 2015, would negatively effect the health of the MMI Fund.

Then, earlier this year just before leaving office, the Obama administration announced a cut to FHA mortgage insurance premiums, which would have been the second time FHA premiums were reduced premiums in two years.

Under the Obama administration plan, the FHA would have cut the annual mortgage insurance premiums most borrowers pay by one-quarter of a percentage point, or 25 basis points.

The cut was due to take effect on Jan. 27. 2017, but in the opening moments of President Donald Trump’s term in office, his administration announced the suspension of the previously announced reduction to FHA mortgage insurance premiums.

There had been some murmurs that the FHA would reinstate the mortgage insurance premium cut, citing the health of the MMI Fund, but while the fund’s capital ratio is above its mandated threshold, the capital ratio fell in 2017.

And according to the FHA, if the Obama administration insurance premium cut had been allowed to take effect, the MMI Fund would have performed much worse.

The FHA 2017 Annual Report shows that had the premium reduction taken effect in January, the MMI Fund’s capital ratio would have fallen to 1.76%, which would be below the Congressionally mandated minimum.

Overall, both the economic net worth and the capital ratio of the MMI Fund fell from levels reported last year. 

The culprit for the volatility in the fund, as it has been in previous years, is the FHA’s reverse mortgage program, the Home Equity Conversion Mortgage program.

According to the FHA report, the standalone economic net worth of the HECM portion of the MMI Fund is -$14.5 billion at the end of fiscal 2017, and the HECM portfolio’s standalone capital ratio is -19.84%.

Conversely, the capital ratio of the forward mortgage insurance portfolio is 3.33%.

Adolfo Marzol, HUD Senior Advisor to Secretary Ben Carson, told reporters Wednesday that the decrease in the HECM portfolio more than offset the increase in forward mortgages in 2017.

Marzol touted the recently announced changes to HECM program as a necessary step, especially given the drag that the HECM portfolio was on the MMI Fund.

Back in August, HUD announced changes to the HECM program to raise premiums and place tighter loan limits.

Those changes officially took effect in October, so they are not reflected in the fiscal 2017 report, but Marzol said that the changes are necessary to get new HECM endorsements coming into FHA on a more fiscally responsible basis.

“The fiscal health of FHA demands our constant attention and vigilance to ensure we can continue providing sustainable homeownership opportunities to working families without exposing taxpayers to excessive risk,” Carson said in a statement.  “Our duty is clear—we must make certain FHA remains financially viable so future generations can build wealth and climb the economic ladder of success.”

As for a future cut to the FHA mortgage insurance premiums, it’s likely far too soon into the changes to see the full impact, but if the changes are effective, a cut could be coming.

But that depends entirely on the continued health of the forward insurance program.

As the report shows, had the Obama administration cut to premiums taken effect in January, the MMI Fund’s Capital Ratio would have fallen to 1.76%.

Marzol told reporters that the analysis of the health of the fund took the suspended cut into account, noting that the expected increase in FHA forward originations due to reduced premiums would not have been enough to counteract the direct loss of future revenues caused by a reduction in premiums.

Additionally, any changes to the FHA insurance programs are unlikely to happen without an FHA commissioner in place.

In September, the Trump administration nominated Brian Montgomery to run the FHA.  Montgomery would take over for acting commissioner Edward Golding, once he is confirmed.

If he is approved, it will be Montgomery's second time as FHA commissioner. He previously held the job under Former President George W. Bush, staying on for six months after former President Barack Obama's inauguration. 

But that hasn’t happened yet.

In the mean time, click here to read the FHA’s full report.

And here are some other highlights of the FHA report:

  • FHA’s cumulative Insurance-in-Force reached approximately $1.23 trillion at the end of FY 2017, an increase of 4.8% from FY 2016
  • FHA endorsed 1,246,440 forward mortgages in FY 2017 (including 882,079 purchase loans) totaling $251 billion in Unpaid Principal Balance
  • First-time homebuyers accounted for 725,102 or 82.2% of all FHA forward purchase loans
  • The average loan amount of FHA-insured forward mortgages was $201,337
  • The average borrower’s credit score was 676 compared to 680 in FY 2016

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