President Donald Trump’s decision to suspend the reduction of mortgage insurance premiums within the first hours of his presidency sent a strong and early message to America that this administration isn't afraid to change things up.
The Federal Housing Administration announced back in January that it was cutting the annual mortgage insurance premiums most borrowers pay by one-quarter of a percentage point, or 25 basis points.
When the Department of Housing and Urban Development announced the suspension, they stated, “FHA is committed to ensuring its mortgage insurance programs remains viable and effective in the long term for all parties involved, especially our taxpayers. As such, more analysis and research are deemed necessary to assess future adjustments while also considering potential market conditions in an ever-changing global economy that could impact our efforts.”
Since the suspension of mortgage insurance premium cuts, the Trump administration has been quiet on any plans to ever bring it back.
But that silence finally broke on Tuesday when HUD discussed updates to its reverse mortgage program.
HUD revealed on Tuesday that is changing the requirements around the Home Equity Conversion Mortgage program, which has faced scrutiny due to the high risks associated with the program. The changes to the program raised premiums and tightened loan limits.
The program, created for seniors aged 62 or older and still living in their home, allows them to withdraw a portion of their home’s equity, according to HUD’s website.
From the outside, the updates don’t involve FHA mortgage insurance premiums or announce any premium cuts.
But, it did provide an overall assessment of the health of the FHA, and if the FHA isn’t financially healthy, there definitely will not be any cuts to FHA mortgage insurance premiums.
Mortgage insurance premium cuts and HECM both impact the FHA’s flagship fund, the Mutual Mortgage Insurance Fund.
The fund insures mortgages made by the FHA on single-family homes and pays the lender if the borrower defaults.
So when the FHA says it “is committed to ensuring its mortgage insurance programs remains viable and effective in the long term for all parties involved, especially our taxpayers,” the health of the MMIF would be a top priority to assess.
And what’s the riskiest part of the MMIF? The FHA’s reverse mortgage program.
While improvements have been made on the reverse mortgage program, it still is one of the most volatile parts of the MMIF.
The big driver of the rise and fall of the MMIF is the health of HECMs. Carol Galante, faculty director at the Terner Center for Housing Innovation and former assistant secretary for Housing/Federal Housing (FHA) Commissioner, explained in a blog with HousingWire, “To those like me, who have followed closely the annual reports of past years, the results also speak to how volatile and different the Home Equity Conversion Mortgage (HECM) program (a reverse mortgage for seniors) is from the broader forward single-family portfolio. Every year since 2010, the HECM portfolio has alternated in large swings between negative and positive economic values.”
“Each year, even though this portfolio is only a small fraction (.1 trillion) of the overall 1.1 trillion dollar portfolio, it impacts the overall capital ratio, which is the measure most relied upon to assess the FHA,” she said.
For example, in 2015, without the HECM program, the MMIF would have come in at 1.65%, below the 2% threshold set by Congress.
When the MMIF is performing well, people start to question whether the FHA should cut its mortgage insurance premiums again.
Looking back to HUD’s statement on when they suspended cuts, they said, “FHA is committed to ensuring its mortgage insurance programs remains viable and effective in the long term for all parties involved, especially our taxpayers.”
And now with the new updates to HECM, Carson said, “Given the losses we’re seeing in the HECM program, we have a responsibility to make changes that balance our mission with our responsibility to protect taxpayers.”
HUD explained in its HECM announcement that since fiscal year 2009, FHA-insured reverse mortgages have resulted in a net cost of $11.7 billion to the FHA MMI fund.
“Last year alone, HUD said that the economic value of the program was a negative $7.7 billion. In addition, HECM losses are making it increasingly challenging for FHA to maintain the overall level of reserves that Congress requires. If FHA does not act, the HECM Program would require an appropriation from Congress for FHA to endorse new reverse mortgages in FY 2018,” the announcement said.
It would be difficult to introduce a cut to FHA mortgage insurance premiums if a separate part of the MMIF, HECMs, were significantly dragging it down. And it was pulling it down so much that would’ve required an appropriation from Congress.
Thanks to the changes to the HECM program, it can stick around as a financial resource for seniors.
And with the biggest burden to the MMIF starting to get under control, it should finally open the door to other HUD changes, such as MIP cuts, especially since the risk to taxpayers lessened.
According to the FHA’s 2015 actuarial report, the MMIF grew to 2.07%, and the growth didn’t come from the HECM program.
Rather, the MMIF's growth came entirely from single-family forward mortgages.
The annual actuarial report for 2016 is slated to come out in November and should shed more light on the health of the MMIF.
If single-family forward mortgages are doing well again and the HECM is projected to improve, FHA mortgage insurance premiums cuts could be coming soon.