Premium Reduction May Give FHA Competitive Edge Over GSEs
The Federal Housing Administration program could see a $50 billion increase in single-family loan endorsements this year if a planned 25-basis-point annual premium cut goes into effect on Jan. 27.
Most of the FHA's windfall will come at the expense of Fannie Mae and Freddie Mac, which is sparking anger among private mortgage insurers.
"The economics for marginal conventional borrowers paying private MI should shift back in favor of FHA execution," said Satish Mansukhani, an MBS strategist at Bank of America/Merrill Lynch.
He expects FHA lenders will see a 12% increase in purchase mortgage activity and a 2% increase in refinancings due to the premium reduction announced Jan. 9 by Department of Housing and Urban Development Secretary Julian Castro.
On the purchase side, "it moves the pendulum a little more in favor of the FHA. I think you will see FHA market share pick up," said Scott Buchta, head of fixed-income strategy at Brean Capital.
Lindsey Johnson, president and executive director of the U.S. Mortgage Insurers, warned that taxpayers are currently exposed to $1.3 trillion in mortgage risk outstanding at FHA.
"Arbitrary reductions to the FHA's MIP is bad policy because it pulls borrowers who would otherwise be served by the conventional Fannie Mae and Freddie Mac market, which is backed by private mortgage insurance for first losses versus the taxpayer," Johnson said in a statement.
The incoming Trump administration may delay or rescind the premium reduction.
The 25-basis-point premium reduction brings the FHA annual premium down to 60 basis points, which is close to pre-housing-crisis levels. Homebuyers also pay a 1.75% upfront fee when they take out an FHA-insured loan.
Buchta at Brean Capital expects a pickup in FHA refinancing activity, but not as big as the refinancing wave in early 2015 when the FHA reduced its annual premium by 50 basis points.
Over the past three months, mortgage interest rates have jumped 50 basis points from 3.5% to 4%, which has offset the 25-basis-point MIP reduction. "The majority of FHA borrowers are out of the money," Buchta said in an interview.
However, that could change if interest rates go up. "If we get the FHA rate back down towards 3.5%, then this MIP reduction will have a much bigger impact," he said.
The agency also reduced its annual premium on FHA jumbo loans with balances greater than $625,500 and up to $636,150.
"On the refinancing front, we expect the biggest impact to be seen in the jumbo cohorts due to the 45-basis-point reduction in the MIP," Buchta said in his Jan. 9 report.
Jumbo loans make up about 10% of the FHA's loan portfolio.
In 2008, Congress raised the FHA loan limit on jumbos to $729,750 during the housing crisis. That expired in January 2014 and the loan limit fell to $625,500.
Due to the recovery in the housing market and rising home prices, the FHA jumbo loan limit has been adjusted up to $636,150.
"As a result, FHA took this opportunity to eliminate MIP rates based upon the mortgage loan size," FHA said in an email Tuesday in response to an inquiry. "FHA does not expect this reduction to have any significant impact on demand…for jumbo loans."