Future market possibilities such as the Federal Reserve ending its rate-lowering bond purchases are unlikely near-term, but they move markets when investors turn their attention to them.
The Federal Housing Administration’s possible reversal of its increased mortgage insurance premiums holds similar potential.
“A decline in annual premiums would result in worse convexity for Ginnie Mae collateral and increase prepayment risk,” a Barclays securitized product research report notes.
Whether this actually occurs depends on whether the disadvantages of recent premium increases outweigh the advantages. This balance has been “at a tipping point,” FHA commissioner Carol Galante recently told the House Financial Services Committee.
Among market developments that could tip this balance is the FHA’s concern over its declining origination activity.
The FHA needs to consider whether lower volume outweighs the benefits it gets from premium increases on loans that help “offset losses from its legacy book,” Barclays says in its report, noting that Galante’s recent comments suggest that it is nearing that point.
Refinancing applications for
FHA volumes have declined because other alternatives have become more affordable, lenders say.
“Mortgage insurance premium changes still continue to push more consumers toward more affordable [private] MI,” said Jean Badciong, an operations executive at lender Inlanta Mortgage in a recent interview.
“Affordability” buyers taking out government loans from the FHA as well as agencies serving veterans and rural areas made up about 40% of Inlanta’s volume as of late summer, but the FHA component of this has been shrinking, she says.
“There is a point where the benefit of increased premiums is more than offset by its negative effect on borrower demand,” Barclays’ securitization researcher Wei-Ang Lee noted in the report.
This is a concern in particular in a high-rate environment.
“When rates are low, it is possible to increase premiums and still offer historical lows in the all in’ rate,” but “the opposite is true in a rate sell-off,” Barclays notes.
The FHA has increased premiums to the extent that it believes it can “without totally destroying access to credit in this country,” Galante said in a question-and-answer session following her “tipping point” remarks.
Ongoing fiscal struggles and reform at FHA could preempt this concern in various ways, though.
The mutual mortgage insurance fund would have to be sound for premiums to drop.
There also are bills that “would explicitly tie the capital ratio with mandatory premium increases” and “increase the required capital ratio” to 3% or 4%, from 2%. This “would hamstring FHA’s ability to set premiums lower,” the Barclays report notes.
