Most everyone in the industry is applauding the move to cut the Federal Housing Administration premiums by 50 basis points, with only a few voices expressing concerns about how wise it is and how effective it will be.
Also, there’s the question whether yet another executive action is really a sign of leadership on housing, or just a plain signal of surrender to irrelevancy by a lame duck White House with no remaining political capital – but that’s a debate for…actually it’s not really debatable, in my humble opinion, but let’s table that.
At the risk of sounding like an Internet contrarian…
…I want to excerpt some excellent points from Andy Winkler’s blog, which I highly recommend, and expand upon further below.
Without ado, here are four reasons the White House’s executive action on housing are troubling.
1. FHA is not in compliance with its congressionally mandated capital ratio.
Buoyed by mortgage settlement money, higher premiums, and other programmatic changes, the capital ratio has rebounded to 0.41% in FY 2014 from -1.44% in FY 2012. Yet the capital ratio is still well below the 2% threshold meant to help protect taxpayers from potential losses. Lowering premiums, which lowers revenue, will likely further delay a return to the capital ratio’s mandated level.
2. FHA has a documented history of missed projections.
Indications that the announced premium reduction will have little effort on FHA’s ability to meet its capital ratio should be taken with a grain of salt. FHA’s recent history has been plagued by missed projections and this year was no different. For many, this enhances the perception that FHA downplays risks borne by taxpayers and casts doubt on the assumption that FHA will continually improve as projected. Since FY 2009, FHA’s capital ratio has been below the 2% minimum mandated by Congress. FHA has repeatedly projected marked improvement only to miss its targets (See Figure 1). Furthermore, in every actuarial review since 2004, the economic value of FHA’s single family fund has come in lower than what was projected the previous year (See Figure 2). While FHA has in the past pointed to programs like Home Equity Conversion Mortgages (HECM) or the prevalence of seller-funded down payment assistance for losses greater than anticipated, inaccurate forecasting of increased house price growth, higher interest rates and higher volumes are more frequently to blame. The decreased revenue that will result from lowering of premiums puts FHA’s future projections of profitability into murkier territory.
(Source: American Action Forum)
(Source: American Action Forum)
3. Failure to restore FHA’s capital ratio puts the work FHA does at risk along with taxpayers.
While many programmatic and operational changes have been made to FHA, concerns over whether FHA can weather another economic downturn are unlikely to dissipate, particularly if its capital buffer is not soon restored at least to the minimum level mandated by Congress. While job growth has been recently strong, the economy must still grapple with headwinds from Europe, concern over plummeting oil prices, a still sluggish housing sector, and the fundamental lack of wage growth.
4. Lowering premiums acts contrary to reducing the government’s role in housing.
The outsized role the government plays in housing continues to be a primary bipartisan concern. While more serious reforms to limit FHA’s mission may come with housing finance reform legislation, increased FHA premiums have helped reduce FHA’s market share, which continues to fall slowly from its peak of about 30%, and allow capable private market participants to compete.
Adding to this, there's a bigger picture issue involved. For starters this is an administration that has largely ignored housing since after the second year of the first term. This is not a considered and well-thought out move. This is a sop. It's a giveaway from an administration trying to buy popularity that it sorely lacks, what with Obama now in the 30s in job approval, and the historic beating the President's party took in November.
If you doubt it, look no further than what the White House announced one day later -- a program to offer "free" community college to anyone who wants to go.
Something that could cost $75 billion on top of a $18 trillion national debt is an interesting thing to call "free" but hey, you know, details.
Anyway, most everyone in the industry likes the idea that this could spur homebuyers, even though there's strong evidence to suggest the effect could be pretty miniscule.
Sterne Agee analyst Jay McCanless says that while many in the industry would welcome the cut, it won’t have as big an impact on housing as many expect.
“Such a change would be marginally beneficial for the average borrower, in our opinion, and consequently, we do not believe this news, if it proves true, is a catalyst for higher housing demand and higher earnings estimates,” McCanless says. “We Estimate the Riskiest Mortgage Borrowers Would Save about $25/month on their Mortgage Payment with Smaller Savings for More Creditworthy Borrowers. In a highly simplified model, we believe a borrower with a $100,000, 30-year mortgage required to pay the FHA's mortgage insurance could save approximately $25 at most on their monthly payment which is the net result of lower insurance premiums (known as MIP) and a higher mortgage rate.
“This savings will pull some marginal borrowers into homeownership, but it isn't enough, in our view, to assume single family housing demand increases above our current assumption of 15.0% single family starts growth in 2015,” McCanless says.
Beyond that, there's also the issue of incrementalism. The post-Dodd-Frank environment is a terrible place. Dodd-Frank is a terrible rule. What's the saying? Bad cases make for bad law. That's what Dodd-Frank is, and so many of its restrictions are ridiculous. Further, there's no reason small banks in Lubbock, Texas, or Bakersfield, Calif., should be punished for what the TBTFs were doing.
In part because of things like Dodd-Frank and other onerous regulations, the share of people under age 30 who own private businesses has reached a 24-year-low, according to new data reported in the Wall Street Journal.
But on the other end, there's the issue of incrementally chipping away at more sound limits on credit boxes, which were just opened up for 97 LTV loans.
AEI’s National Mortgage Risk Index for Agency purchase loans rose in November to 11.69%, up from the average of 11.29% for the prior three months, a series high.
The risk indices for Fannie Mae, Freddie Mac, the FHA, and the VA all hit series highs in November. With the addition of 208,000 home purchase loans in November, the total number of loans that have been risk rated in the NMRI since November 2012 moved above 5 million.
I want housing to thrive. We all do. But the thing is, I also don't want taxpayers -- which is
all 47% of us -- to be on the hook if things get hinky again.
This is worth watching. And hey, lucky me, that's our job here.