The Federal Housing Administration expects its new mortgage insurance premium structure that goes into effect Oct. 4 will increase revenues at the government insurer by $4.1 billion annually and put the fund on a stronger financial footing.
FHA commissioner David Stevens told the House Financial Services Committee Wednesday morning that FHA efforts to improve its credit policies, improve risk management oversight, and ban bad actors from the industry have improved the loan performance of government-backed home mortgages.
Congress passed legislation in August that gives the FHA the flexibility to adjust its premium structure.
On Oct 4, FHA lenders will reduce the 225 basis point upfront premium to 100 bp. At the same time, the FHA 55 bp annual premium will be increased to 85 bp for mortgages with loan-to-value ratios up to and including 95%, and to 90 bp for LTVs above 95%.
"We are confident this new premium structure is sound policy, more in line with private mortgage insurers’ pricing, and will facilitate the return of private capital to the mortgage market," Stevens testified.
Last year's actuarial review projected FHA would see a $2.6 billion decease in capital reserves during the first three quarters of fiscal year 2010 (which ends Sept. 30) due to high claims on defaulted single-family mortgages.
However, net income has increased by $450 million and capital reserves have increased by $1.3 billion as of June 30.
The FHA commissioner seems optimistic about the results of a new actuarial report that is close to being completed by independent auditors.
In response to questions, Stevens said the performance of FHA-insured loans has improved. But he would "not assume" that the actuarial report will show an increase in FHA capital reserves due to the actuaries' projections on several variables, particularly future home prices.
"We expect to deliver the findings of this independent study to Congress in November, which will include an official measure of the capital reserve ratio," he said.
The last actuarial report showed that FHA's capital reserve ratio dropped below the statutory 2% minimum to 0.53%.
