When the Federal Housing Administration’s flagship insurance fund finally surpassed its congressionally mandated capital threshold of 2% in 2015, it was seemingly a cause for celebration.
It was, after all, the first time the Mutual Mortgage Insurance Fund had exceeded its required ratio since 2008, but Department of Housing and Urban Development Secretary Ben Carson said earlier this week that exceeding 2% isn’t good enough.
In an interview, Carson told HousingWire that he would like to see the MMI Fund at more than double its mandated threshold of 2%, and because of that, there won’t be any changes made to FHA mortgage insurance rules or premiums this year.
Carson revealed this news earlier this week in an interview with HousingWire conducted at the Mortgage Bankers Association’s Annual Conference in Austin, Texas.
While giving his keynote address, Carson told the crowd that HUD and FHA plan to build the MMI Fund’s capital ratio well beyond 2%, intimating that there will likely be no changes to FHA mortgage insurance premiums this year.
Later, HousingWire asked directly if that meant that there are no anticipated changes to FHA mortgage insurance premiums coming this year. To which Carson replied, “Correct.”
In Carson’s view, the MMI Fund should be much stronger than it has been in recent years before the agency makes any changes to FHA mortgage insurance rules.
“We want clearly (for the MMI Fund) to be to robust,” Carson told HousingWire, adding that additional changes that could be made to FHA lending rules to increase credit availability if the fund was at a higher level.
“You know, there was a time the MMIF was like 6%,” Carson said. “That gives you a lot of flexibility. When it comes to experimenting with things, maybe looking at alternative credit sources, there are a lot of things you can do when you’re up at 6% that you can’t do when you’re at 2%.”
While Carson discussed the possibilities that would be presented by the MMI Fund topping 6%, he said his goal for the fund’s health is lower than that still beyond where it’s been in recent years.
“I definitely want to see it over 4%,” Carson told HousingWire.
HUD is due to release its annual actuarial report in approximately two weeks. The report, which is typically released in mid-November, provides insight into the health of the FHA’s insurance fund.
In recent years, the fund has remained above its mandated threshold of 2%. Last year, for example, the fund’s capital reserve ratio came in at 2.76%.
Much of the growth in the MMI Fund in the last few years has been because of the FHA’s forward mortgage program, rather than the reverse mortgage program, which has dragged the fund down.
And considering what kind of year it’s proving to be for the mortgage business, it’s likely that the MMI Fund will prove to be in good health this year.
But that doesn’t mean anyone should expect a FHA MI premium cut, even though there are efforts in Congress to see one put into place.
“I remember when I first came (to HUD), they said, ‘the capital ratio is above 2%, we need to get a 25-basis-point reduction,’” Carson told HousingWire. “And now we have some Congressional bills that have been put forth that says we should give people a 25-basis-point reduction if they take financial literacy courses, without any regard to what’s going on. It’s crazy stuff.”
Carson is referring to The Housing Financial Literacy Act of 2019, or H.R. 2162, which stipulates that first-time homebuyers who complete a housing counseling program to learn about sustaining homeownership can get a 25-basis-point discount (0.25%) on their upfront mortgage insurance for an FHA loan.
In Carson’s view, he wants the MMI Fund to be even healthier before making changes that could negatively impact it.
The fund’s health has improved over recent years, showing growth in five straight years, before declining last year.
Much of the volatility in the FHA fund in recent years has been caused by the HECM (or reverse mortgage) portion of the portfolio.
The FHA worked to address that unpredictability in recent years, announcing new HECM rules in 2017 designed to stop the bleeding, but the new guidelines stifled the program and limited the pool of eligible borrowers.
Carson said that HUD feels good about the changes that were made to the HECM program, but wants to do more.
“The hemorrhaging appears to have stopped,” Carson said, in reference to the HECM portfolio. “But we’re still keeping a close eye on it.”
Carson said HUD is asking Congress to separate out the HECM portfolio from the forward mortgage portfolio because the two segments perform so differently on a yearly basis.
“We would like HECM to have its own capital reserve,” Carson said. “But, Congress will have to do that.”
If they do, Carson said, “everything becomes much more transparent” in terms of the HECM program and its associated costs and benefits.
“Right now, even though we’ve been able to achieve a positive capital ratio, look at the drain that’s been going on,” Carson said.
Another change that FHA could enact is to remove the life-of-loan policy, which requires most FHA borrowers to maintain mortgage insurance throughout their entire loan term, regardless of how much principal is still owed.
In this way, the FHA’s mortgage insurance program works differently from private mortgage insurance, which typically falls off after a borrower reaches a certain principal balance.
The FHA’s policy wasn’t always this way.
The FHA’s previous policy of requiring borrowers to pay mortgage insurance premiums until the outstanding principal balance reaches 78% of the original home value, but the FHA instituted the life-of-loan policy back in 2013, as part of an effort to improve the health of the MMI Fund.
The FHA needed a $1.7 billion bailout in 2013, due to the significant shortages in the MMI Fund. As stated above, the fund’s health has improved, but not to the point that Carson is comfortable pursuing a change to the life-of-loan policy.
“Recognize that the life-of-loan policies apply differently to FHA then they would to private mortgage insurers, or even the GSEs,” Caron told HousingWire. “They have different obligations. Our obligation continues forever. Theirs’ don’t. It’s apples and oranges.”