Congressional Action Could Halt Shift to Private Mortgage Insurance
The Federal Housing Administration emerged from the bust as the dominant form of a mortgage guarantee program (while during the boom it had all but disappeared).
But the increased risk, as well as a desire by politicians to reduce FHA’s role, has led to a series of Mortgage Insurance Premium Fund fee increases.
At the same time, those politicians are looking to bring in more private capital to the secondary market and reduce the government exposure to, if not just outright eliminate, Fannie Mae and Freddie Mac. They also see the two government-sponsored enterprises as a means of funding government operations.
These desires have a resulted in a series of guarantee-fee hikes which end up increasing the cost for conforming low downpayment mortgages.
Some in the private mortgage insurance industry are sounding the alarm, fearing a growing swing back towards a GSE/private MI execution from FHA will be reversed.
“Further increases in g-fees on low downpayment loans will result in moving those markets back toward FHA and shifting the risk back to taxpayers,” said Rohit Gupta, president and chief executive of Genworth U.S. Mortgage Insurance.
At a National Mortgage News roundtable held at the Regional Conference of Mortgage Bankers Associations in Atlantic City, Peter Norden, CEO of Real Estate Mortgage Network Inc., discounted the possibility.
He said there is a big difference between two. “With a guarantee-fee increase, all you are doing is increasing the yield on a security and you’re adjusting the servicing component up or down accordingly.
“The consumer does not know that they are paying anything more, even though they are because it does get passed through. The FHA premium, the consumer is paying it directly. They’re paying upfront and they are paying over the life of the loan.
“So the consumer is much more resistant to that FHA fee. I don’t think that is going to be a real component that is going to drive people one way or the other,” said Norden.
Ironically, the day after the roundtable took place, S.A. Ibrahim, CEO of Radian Group Inc. during his presentation at the Atlantic City show, reiterated his concerns regarding g-fee increases impacting the shift away from FHA and government programs to private ones.
In an interview with NMN after the conference, Ibrahim explained the Federal Housing Finance Administration should not raise those g-fees out of alignment with increases in the FHA MIP.
If things are done “in the wrong way, all it does in the short term is push business to FHA away from the GSEs and therefore the MIs.”
With FHA, the government bears 100% of the credit risk. Using private MI in the current secondary market model (the GSEs under conservatorship), while the government still bears 80% of the credit risk, the private MIs take the riskiest piece, Ibrahim said.
There is another piece to this pie. Because of changes in federal law, the FHA has a higher loan limit than the GSEs and that needs to be fixed, he continued. Congress’ actions have been counter to what its stated intent has been, Ibrahim said.
It is typically at the loan officer level where the decision whether a borrower applies for conventional or government loans is made. Factors such as monthly payment do have an impact, but also does annual percentage rate have an influence on which way a loan officer decides to move on the application.