OCT 25, 2013

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What We're Hearing

Private Insurers Capturing FHA’s Best Borrowers

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WE’RE HEARING that FHA is losing its best borrowers to private mortgage insurers due to its higher-priced premiums.

But Federal Housing Administration officials don’t seem to be worried at this point. FHA commissioner Carol Galante has larger concerns—mainly the political damage caused by taking a $1.7 billion draw from Treasury to shore up the insurance fund.

At a Zillow/Bipartisan Policy Center conference in Washington, Galante noted the average credit score on new endorsements has edged down from 700 earlier this year to 690.

Part of that might be explained by lenders easing up on credit overlays, she said. “I think most of it is that FHA is losing its top borrowers to the MIs.”

FHA currently charges a 1.75% upfront premium along with a 1.35% annual premium. The upfront premium can be financed into the loan amount. But the annual is paid monthly and it’s a killer.

On a $200,000 FHA-insured loan, the monthly premium is $225 compared to $103 on a privately insured loan. A recent report by Keefe, Bruyette & Woods noted that private mortgage insurance is “meaningfully more attractive” for borrowers with FICO scores 700 and above.

“Going forward, we believe that higher-quality borrowers will take GSE loans with private mortgage insurance as opposed to FHA loans because of the significant price advantage,” the Oct. 21 KBW report says.

To stem this loss of business, it would be logical for FHA to reduce the annual premium.

But the Obama administration wants FHA and the GSEs to reduce their footprint in the mortgage market.

And the annual premium is critical in terms of rebuilding FHA’s capital reserves. Reducing FHA premiums now would stir up congressional critics who claim the FHA fund is one step away from a huge bailout.

When asked about restructuring FHA’s premiums, Galante said FHA is priced appropriately. The annual premium is “better from a risk management standard point for the fund in terms of its long-term stability.”

But it may be a matter of timing.

In a few weeks, FHA will release its annual actuarial report, which provides long-term estimates of revenue or losses on its insured books of business.

The fiscal year 2012 actuarial report prepared by independent auditors showed the FHA fund had a negative economic value of $16.3 billion and a negative 1.44% capital reserve ratio.

Last year’s report prompted House Financial Services Committee chairman Jeb Hensarling, R-Texas, to declare FHA is “bailout broke.”

FHA officials expect the new FY 2013 actuarial report will show a vast improvement in FHA’s finances. You can tell that by the way HUD officials insisted they didn’t need the $1.7 billion draw. That was Treasury’s decision—not theirs.

FHA officials claim the single-family program is generating more revenue than it is paying out in claims and other expenses. It was losses from the reverse mortgage program that forced FHA to take a $1.7 billion mandatory draw.

If the actuarial report is positive, it could open the door for Galante and her staff to start a review of its premium structure.

“I do think it is time for FHA to look at where we are coming out of the crisis,” Galante said. “It is time to dig in and look at these policies more closely.”

Mark Fogarty is editorial director of the SourceMedia Mortgage Group and has been commenting on the mortgage market since 1984. Brian Collins is the group’s senior editor and D.C. bureau chief. He has worked the mortgage beat since 1988.

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