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Urban Institute Tells FHA Why MIP Reduction is the Way to Go

Just days prior to the Obama Administration announcing it would be reducing mortgage insurance premiums for forward loans insured by the Federal Housing Administration, the Urban Institute urged the administration to that end.

Now that the Federal Housing Administration’s Mutual Mortgage Insurance Fund (MMI) is back in the black, it’s time to stop overcharging today’s borrowers on insurance premiums, says the Washington, D.C.-based think tank.

In an analysis this week on the 2014 Actuarial Report on the FHA’s MMI Fund released in November, the Urban Institute comments that while the Fund reported $4.8 billion in value, the results push back the FHA’s return to its congressionally mandated minimum of 2% in capital reserves to 2016.

The analysis also explains the shortfall on the Home Equity Conversion Mortgage portion of the portfolio, largely attributed to interest rates and an overly optimistic outlook for the value of the HECM portfolio under previous projections.

“The mixed message of the actuary—showing an agency whose business continues to improve, though not as quickly as had been expected—raises the question of whether the FHA can afford to lower their historically high insurance premiums, expanding access to credit and avoiding, at least in part, a worsening adverse selection problem,” the Urban Institute wrote.

Analyzing several different scenarios and formulas, the Urban Institute goes on to suggest that netting $2 billion to $3 billion in 2015 for the Fund is a “more appropriate pace that won’t overcharge new borrowers to make up for undercharging in the past.”

“If the FHA’s ultimate goal is to break even with each vintage, there is a room for a significant premium cut,” suggests Urban Institute.

To this end, the Urban Institute says that even if FHA succeeded in taking on a much broader book, with a greater number of higher risk borrowers and expected losses, the agency could cut annual premiums in half, from 1.35% to 0.65%, and still break even.

The analysis was published just days before Secretary of the Department of Housing and Urban Development Julian Castro released a statement confirming that President Obama would reduce FHA mortgage insurance premiums by 0.5 percentage points, from the current 1.35% to 0.85%—changes that are elected to go into effect by the end of the month.

The reduction would not apply to the Home Equity Conversion Mortgage program, a HUD spokesman confirmed to RMD.

Written by Jason Oliva

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