FHA losing customers rapidly as premiums spur refinancing

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WASHINGTON — The Federal Housing Administration’s financial health is benefiting from continued reductions in delinquencies and foreclosures, but the FHA is also losing some of its best customers at a fast clip.

The “serious” delinquency rate (90 days or more past due) on FHA-insured home loans dropped to 4.28% in the third quarter of fiscal year 2017, according to an FHA quarterly report delivered to Congress late last month. That was down from 5% in a year earlier, and nearly 10% in 2011. The FHA is also enjoying a sharp decline in total claim and loss mitigation expenses. It paid $2.3 billion in total claims expenses in the third quarter, compared with $4.5 billion a year ago.

But at the same time, more FHA homeowners than expected are refinancing out of the program and into conventional mortgages, despite an increase in mortgage rates over the past year.

The latest data shows that 761,100 FHA borrowers had refinanced over the first three quarters of in fiscal year 2017, as of June 30. That is 125% above what FHA auditors had predicted for the entire fiscal year in last year’s FHA actuarial report. (The fiscal year ended Sept. 30.)

More borrowers are leaving the FHA likely because of the annual premium they must pay for government insurance over the life of the loan. Private mortgage insurance on conventional mortgages can be cancelled once the homeowner reaches the 20% equity mark. But the only way homeowners can cancel their FHA mortgage insurance is to refinance into a Fannie Mae or Freddie Mac conventional loan.

The Department of Housing and Urban Development had decided to cut the annual premium last year, but delayed the decision after Secretary Ben Carson said he wanted to study the issue.

The updated data is likely to be reflected in the FHA’s upcoming actuarial report for 2017.

Homeowners are likely drawn to refinancing as a result of higher home prices. Frank Nothaft, CoreLogic’s chief economist, noted that in areas where home prices are going up, "it doesn't take too long for borrowers to accumulate that 20% equity."

Meanwhile, "prices on lower-priced homes are showing faster appreciation than higher-priced homes," Nothaft said during a CoreLogic/Urban Institute housing conference last week.

CoreLogic estimates that home prices will be up 6% by the end of 2017 and rise 5% in 2018.

The FHA implemented its life-of-loan policy for premiums in the summer of 2013 when the FHA mortgage insurance fund was in dire straits because of mounting defaults and foreclosures.

Since then, the percentage of FHA borrowers who refinance back into an FHA-insured mortgage has dropped to 14% as of August.

That is the lowest level since 2010, according to Brian Chappelle, a mortgage consultant at Potomac Partners. Before the policy change in 2013, the FHA's retention rate "was above 50%," Chappelle said.

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Mortgages PMI GSEs Refinance Home prices FHA