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FHA will not cut mortgage insurance premiums

Actuarial report reveals insurance fund is in good health, but Montgomery says premiums will stand

The Federal Housing Administration released details on the health of its flagship Mutual Mortgage Insurance Fund Thursday, revealing a positive economic net worth and acceptable capital reserves.

But despite the fund’s positive subsidy – and marked improvement over last year – FHA Commissioner Brian Montgomery said the agency will not be reducing mortgage insurance premiums any time soon.

In its 2018 Annual Report to Congress, FHA said the MMI Fund had an economic net worth of $34.86 billion, up $8 billion from last year.

It also posted a capital reserve ratio of 2.76%, up from last year’s 2.18%.

The fund is required by Congress to maintain at least a 2% ratio in reserves, which it has done now for the fourth consecutive year.

But even though the statutory minimum has been met, current mortgage insurance premiums will stand.

“We do have to be realistic about the fact that that is still a relatively thin margin,” Montgomery said on a call to reporters Thursday. “While the MMI Fund is sound at this point in time, I think we’re still far away from being in a position to consider any reduction in our mortgage insurance premiums.”

The report revealed that, over the course of fiscal year 2018, FHA endorsed 1.06 million forward loans, including 776,284 purchase loans, totaling $209 billion in unpaid principal balance.

Of those borrowers, 82.7% were first-time homebuyers, according to the report, and 33.8% were minorities.

The average loan amount for FHA-insured forward mortgages was $206,041.

“The financial health of FHA single-family insurance fund is sound,” Department of Housing and Urban Development Secretary Ben Carson said on the call. “Under Commissioner Montgomery’s leadership, FHA is in good hands, guarding against excessive risks, protecting the American taxpayer, and remaining true to our core mission to facilitate safe and affordable mortgage options for qualified borrowers.”

But Carson also pointed out several concerning details brought to light in the report, noting that “there are some risk factors that we need to play close attention to.”

Carson said the reverse mortgage book of business is of particular concern, as the program continues to be subsidized by FHA’s forward borrowers.

The report showed the HECM program had a negative capital ratio of 18.83% and a negative economic net worth of $13.63 billion in the last fiscal year.

Despite this, the agency said it will not be issuing further reverse mortgage program changes just yet, noting that changes instituted last year appear to be nudging the program in the right direction and that it is optimistic that it will continue to improve over time.

Carson highlighted other trends in the agency’s forward book that he called concerning, including a substantial increase in the number of cash-out refinances, a drop in the average credit score coupled with an increase in borrowers with high debt-to-income ratios, and a greater number of borrowers seeking down payment assistance.

Montgomery added that cash-out refinance volume has grown “astronomically.”

“Cash-outs comprise more than 63% of all refinance transactions this past fiscal year, up from nearly 39% last year despite a decrease in our overall refinance volume in FY 2018,” he said on the call. “An increase in cash-outs poses a potential future risk for us, but also challenges the core tenants of FHA’s taxpayer-backed mission.”

Montgomery also said that the percentage of borrowers with a DTI ratio above 50% has reached an all-time high, and that the average credit score of 670 was the lowest the agency has seen since 2008.

“We remain concerned about some of the performance indicators in our book,” he said, adding that the agency plans to issue polices to address the problems in the near future.

“We will be making some additional changes soon. I couldn’t give you the exact date, but again, we want to find that critical balance between providing people the opportunity for sustainable homeownership, but again, we have to maintain the right balance to protect taxpayers against risk,” he said.

Montgomery said one change agency is considering is the implementation of a second-appraisal on select loans for its forward business to combat inflated valuations, just as it did for reverse mortgages last month.

But while Montgomery said the agency has seen a similar pattern of inflations on the forward side – mostly stemming from 2009-2010 originations – he admitted that the volume of forward business makes a similar review less feasible. Still, he said it’s “something we’re assessing now.”

Several high-profile members of the housing industry issued statements in response to the findings of this year’s actuarial report, calling the news positive and encouraging, but also suggesting that premiums could be reduced in light of the positive subsidy.

"The report clearly shows that actions instituted by HUD Secretary Ben Carson and FHA Commissioner Brian Montgomery to enhance the agency's capital reserves are showing positive results,” Randy Noel, chairman of the National Association of Home Builders. “It's also another indicator that FHA's financial picture continues to brighten and should provide momentum for the agency to consider a mortgage insurance premium reduction to help first-time homebuyers and young families seeking to enter the housing market."

John Smaby, president of the National Association of Realtors, echoed this idea.

“Given the strength of the forward program, NAR believes it is time for the administration to revisit the requirement that FHA borrowers must pay premiums for the life of the loan,” Smaby said.

“Overall, it is clear that taxpayers are continuing to benefit from an FHA that is committed to its core mission,” he added. “The report confirms the agency is appropriately managing risks while facilitating affordable housing opportunities for lower- and middle-income Americans.”

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