The Federal Housing Administration will continue to charge borrowers an annual premium over the entire life of the loan, rejecting calls from some housing advocates to change how it’s calculated.
"I am not actually considering a change to the life of loan policy," said Edward Golding, the deputy principal assistant secretary for FHA, at a House Financial Services subcommittee hearing on the health of the agency’s mortgage insurance fund.
The Community Home Lenders Association has been pushing for FHA to drop the requirement, arguing it isn’t fair a charge the fee after the loan-to-value ratio hits 78%.
By the time the LTV hits 78%, the borrower has already paid upfront and annual premiums that equals nearly 10% of the loan amount, according to CHLA Executive Director Scott Olson.
"At a certain point, you have paid so much in fees that we don't think it is fair," Olson in an interview Thursday.
But Golding told the subcommittee members that FHA defaults “occur a lot longer after origination than people expect.”
He noted that the guarantee fees Fannie Mae and Freddie Mac charge are for the life of the loan.
Before FHA ran into financial troubles due to the housing turndown and rising loan defaults, the annual premium was terminated when the loan-to-value ratio hit 78%.
FHA reduced its 1.35-basis-point annual premium to 85 basis points in January 2014, which led to an increase in loan production and helped the agency’s fund reach its statutory minimum capital ratio of 2% in September 2015.
During the hearing, Reps. Andy Barr, R-Ky., and Scott Garrett, R-N.J., said Congress should raise the minimum capital requirement to 4% to deal with next economic recession.
But Golding said he believed “the 2% standard is a good standard,” even while adding that “we are building reserves above 2%.”
He resisted Garrett's suggestions that FHA adopt a higher capital standard or stress testing similar to what is required of the banks.
But the FHA chief agreed to work with Garrett on determining the amount of capital that would be needed to survive another great recession. "That would be fantastic," Garrett said.
