FHA Commissioner Julia Gordon talks MIP cut

High level of capital reserves guided decision to ease affordability challenges

More than two years after mortgage industry trade groups began openly calling on the Federal Housing Administration (FHA) to cut annual premiums on mortgages the agency insures, the Biden administration and the FHA have done just that.

They’ve cut the annual premium to 55 basis points from 85 bps. In doing so, the White House claims the average FHA borrower and homebuyer will save $800 in 2023 alone.

Agency officials hope to boost affordability in a frightful housing market, in which median home prices hover near record highs and mortgage rates slowly approach the 7% level.

The Biden administration says the annual premium cut will help FHA borrowers, a higher proportion of which are Hispanic and Black borrowers and tend to have lower incomes and credit scores than other government-backed mortgage programs.

We caught up with Julia Gordon, the FHA commissioner, to talk about the premium cuts, potential risks and the Federal Housing Finance Agency‘s recent reduction in loan-level pricing adjustments for first-time homebuyers and borrowers with lower FICO scores.

This interview has been lightly edited for length and clarity.

Flávia Furlan Nunes: How was the decision made to get to the 30 basis points cut?

Julia Gordon: We analyzed the current state of the fund. And then we stressed the fund. We used scenarios where the economy or the housing market faced extreme pressures. And we looked at the amount we would need to have in reserve to maintain our capital ratio through those difficult times. And we set that as a buffer. So we made the size of the cut to the point where it would not eat into that buffer. The size of this is very prudent based on those analytics and stress tests. We also had to make it large enough to be meaningful to borrowers. So those were the two polls. And that’s how we came down on the 30 basis points. For right now, we will be sticking here for a while. 

Flávia Furlan Nunes: The current 11.1% capital ratio is nearly more than five times the statutory requirement. And the FHA acknowledged that even under a 2007-level stress test scenario, the capital ratio would still exceed 6%. Has that changed? Does the FHA see any greater risks than when they conducted that stress test scenario?

Julia Gordon: We’re in very good financial shape right now. I would say there are two big risks. One is generally the macro economic environment and in particular jobs. If you hit a bad spell of unemployment, defaults will rise, and potentially claims will rise. So, that’s always a risk for any mortgage insurance company. You always have to look at employment, interest rates, of course. And for us, in particular, the specific risk that we look to now is the borrowers in our portfolio who still remained delinquent post pandemic. So, we have about 350,000 ish borrowers who are still in default, and who still need help. We’ve created new and very powerful tools for servicers to help them but it is possible that some of them will go to foreclosure and a claim. And so of course, we need to leave a buffer for that possibility, as much as we would like to prevent it through the operational work of the mortgage servicers. But again, like I said, we took all of those things into account when we settled on the number that we’ve announced today. 

Flávia Furlan Nunes: How low can the capital ratio go with today’s announcement?

Julia Gordon: We’re not aiming at any particular capital reserve number. What we wanted to do when we saw our reserves were very high was we wanted to make sure that the homebuyers of America were having their loans priced in a way that made homeownership more accessible and that’s why we made this cut. It may or may not have a big impact. I would expect the ratio to go down some. I have no idea how much. 

Flávia Furlan Nunes: How are you seeing the MIP reduction in terms of the FHA’s market share? I’m curious because FHFA recently took steps to help first-time homebuyers and those with lower credit scores. Those are people who might otherwise have been FHA borrowers. 

Julia Gordon: FHA is a program designed for people who are not reached by the conventional market. So we don’t manage to a particular market share. That’s not our goal. Our goal is to help the people who are not helped by other channels. That said, we do anticipate that following this cut, and this is according to or you can read mortgage analysts who are posting about this right now that there is not likely to be a significant shift one way or the other, really the goal we all have, and we share this goal with FHFA. The goal of both FHA and FHFA is not just to pass borrowers back and forth between us, it’s to grow the pie, so more people can become homeowners. And that’s what we’re aiming to do both with our pricing policies. And with the other changes we’re making to the credit box, like the changes involving counting positive rental history, and more accurately assessing student debt. So really, the goal that is shared across all of these channels is helping more people get their foot on that first rung of the homeownership ladder. 

Flávia Furlan Nunes: The decision is focused on single family – was there any consideration to also cutting premiums for multifamily?

Julia Gordon: FHA is a government mortgage insurance program. We have three separate portfolios: single family, multifamily, and health care. Single Family is associated with an insurance fund called the mutual Mortgage Insurance Fund. The other two portfolios are in a different fund. So, we treat them separately for the most part. That’s why this applies to single family loans. Also, the premiums for apartment buildings and residential care facilities and the like, that’s an extremely different kind of transaction than a single-family mortgage. So, a policy action will rarely, if ever, I think probably never affect all of those portfolios at the same time. They’re very separate businesses. Only the MMI, as the mutual Mortgage Insurance Fund, has a statute that requires a particular capital ratio.

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