The high annual premium "directly affects debt-to-income ratios making loans and home purchases less affordable," according to the Community Home Lenders Association.
The Federal Housing Administration has increased the annual premium over several years to cover loan losses and to recapitalize the FHA mortgage insurance fund.
However, the annual premium is now the highest in FHA's history and FHA is estimated to net a $14 billion profit in fiscal year 2014, which ends Sept. 30.
"We think it is time to ease up on the heavy annual premiums that are becoming a drag on home purchase affordability," said Scott Olson, the trade group’s executive director.
In December, FHA endorsed 73,200 single-family loans, 67% of which were mortgage purchase loans. The Community Home Lenders Association said it is not proposing to reduce premiums on FHA-backed refinancings.
The trade group suggested reducing the 1.35% annual premium to 0.7% or 0.5% for borrowers that complete pre-purchase homeownership counseling. To recoup some of the reduced premium income, it also suggests hiking the current 1.75% upfront premium to 3%.
"This [upfront premium] increase would likely recoup around 40% of the loss of the annual reduction, thus cushioning the financial impact" the group says in a letter to the White House Office of Management and Budget.
The high annual premiums have been manageable thanks to low mortgage rates. As rates move higher, the lenders group's members are concerned it will make it tougher for homebuyers to qualify for a FHA loan and become a drag on the housing recovery. Overall, the trade group is proposing a shift in FHA revenue from the annual premium to the upfront premium.
Relying too heavily on the upfront premium can reduce FHA receipts by pricing "borrowers out of the home purchase market," according to the Feb. 18 letter to OMB.
The group also warns that it may be a short-sighted policy that will encourage FHA borrowers to refinance after four or five years.
"Excessive annual premiums can also lead to borrowers refinancing out to other loan sources as the loan matures—precisely at the point in time when FHA loans are safest—thus depriving FHA of revenue when the loan is paid off."