Donovan Defends FHA Premium Rise at Senate Committee Hearing

Tighter credit standards, along with Congressional approval of higher annual mortgage insurance premiums will enable the Federal Housing Administration to replenish its capital reserves by 2013, possibly as early as 2012, Congress heard. The Department of Housing and Urban Development is on track to raise the FHA upfront premium 75 basis points this April to 2.25% and raise its down payment requirement on homebuyers to 10% for borrowers with credit scores below 580, HUD secretary Shaun Donovan testified at a Senate Appropriations Committee hearing. But FHA would prefer to set the upfront premium at 1% and raise the annual premium to 90 basis points on single-family mortgages with loan-to-value ratios above 95%. FHA is asking Congress to raise the cap on annual premiums from 55 bps to 1.55%. Raising the annual premium would be "safer for homeowners and better for the health of the FHA fund," Mr. Donovan told Senate appropriators. The secretary also noted that the new premium structure is more in line with the private mortgage insurance companies, which have seen their market share shrink as FHA's has grown in the past three years. "Increasing the premiums is the single most important thing FHA can do to encourage the private market to return," the secretary testified. He noted that private insurers are already moving back into the market on the expectation that FHA is increasing the upfront premium to 2.25%. If Congress approves the annual premium adjustment, FHA will be able to meet its minimum 2% capital ratio in a few years, the secretary told committee chairwoman Sen. Patty Murray, D.-Wash. "We believe the 2% is achievable by 2012 or 2013 based on conservative assumptions," Mr. Donovan said.