Prepay Options Mean FHA New World

FEB 26, 2013 4:02pm ET

WE’RE HEARING…that some of the relative call protection found in Ginnie Mae securitizations may not last.

“Improving home prices and increased private MI availability could open up a refinancing outlet for certain FHA borrowers over time,” Barclays researchers Nicholas Strand, Wei-Ang Lee, Sandipan Deb and Rohan Joshi tell us in a recent report. “This would erode the call protection afforded by MIP protected collateral.

“Higher premiums increase the attractiveness of other mortgage options that have lower ancillary fees,” the researchers write. “Specifically, for FHA borrowers that qualify, we believe a conventional loan (with private MI if needed) will become an increasingly viable refinancing outlet over time.”

Barclays finds that private mortgage insurance originations “have rapidly increased market share relative to FHA” and “the number of FHA loans that refinance is now outpacing those endorsed, another sign of growing FHA to conventional refinances.”

The percentage is currently still relatively low but significant, according to Barclays. The company’s research estimates that conventional refinances represent about 20% of all FHA refinance activity.

Barclays, however, believes that “improving home prices and increased private MI availability should intensify current trends and meaningfully increase this contribution over time.”

Politics also argue for sustained higher FHA mortgage insurance premiums, according to the report.

“Higher premiums fulfill dual purposes for HUD,” Barclays notes. “First the proceeds benefit the FHA [Mutual Mortgage Insurance] fund, which has been greatly weakened during the housing downturn.

“Increased premiums also reduce FHA market share by making the FHA option more expensive. This fulfills a stated HUD goal to return the FHA market share to historical norms.”

At the same time Barclays finds that “private MI…credit is returning” as “improving home prices have led to a loosening in PMI underwriting standards.

“This has led to a significant boost in the availability of PMI credit,” the company’s researchers tell us, noting that they expect “new initiatives should increase PMI availability further.”

Specifically, Barclays notes that “over the past month, major PMI lenders have released a new initiative to further streamline the MI process. Under the new program, the borrower only needs to qualify for a loan under the GSE automated [underwriting] systems with some “modest overlays.”

By doing this, “PMI companies have effectively removed geographic and credit overlays that had restricted PMI credit over the past few years.”

The report acknowledges that “PMI lending generally does not extend above 97% LTV, where most FHA borrowers start their loans.

“However, home price accumulation can lower the borrower LTV into a range that PMI lenders are comfortable with,” Barclays noted.

Bonnie Sinnock is managing editor of National Mortgage News and editor of Origination News. She has been covering the mortgage industry since 1995.

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