FHA premium cancellation bill reintroduced in the House

A bipartisan bill looking to end the Federal Housing Administration's life-of-loan requirement for that form of mortgage insurance coverage has been reintroduced in the House of Representatives.

The Mortgage Insurance Freedom Act was previously introduced in last year's lame duck session of Congress by Rep. Gregory Meeks, D-New York, and Rep. Pete Sessions, R-Texas.

Under current federal law, private mortgage insurance — the credit enhancement for low downpayment mortgages in direct competition with FHA — must be cancelled by the mortgage servicer when the loan-to-value ratio reaches 78%.

The FHA requirement for life-of-loan coverage has only been in place since June 2013, introduced at a time when the Mutual Mortgage Insurance Fund was depleted. Now the Fund is strong again, at 11.47% as of the end of the last federal fiscal year.

Why Reps. Meeks and Sessions introduced this proposal

"This legislation is designed to help Americans keep more of their hard-earned money while making homeownership more attainable," Meeks said in the press release. "By saving FHA borrowers hundreds of dollars annually, it gives families greater financial flexibility to put toward savings, investments, and daily needs."

The proposal fixes a "key inequity" in FHA versus the private product by eliminating unnecessary mortgage insurance for individuals who have built significant equity, Sessions added. "This practical bill rewards financial responsibility and delivers meaningful relief to homeowners across the country."

In the second quarter, insurance-in-force at FHA grew 9.7% annually, outpacing mortgage insurance, which increased by just 1.6%, according to Keefe, Bruyette & Woods.

KBW expects FHA to keep growing faster than the private product as rates are expected to remain in a higher-for-longer environment, it said in the August report.

Reasons industry and consumer groups support this bill

The Broker Action Coalition reprised a past position in the Meeks' press release, joined by the Mortgage Bankers Association and the National Urban League.

FHA borrowers "should have financing options comparable to those with conventional mortgages," said Bill Killmer, the MBA's senior vice president of legislative and political affairs. "Urging HUD to eliminate FHA's life-of-loan requirement through a data-driven process would be a meaningful step toward making homeownership more affordable and attainable for American families."    

Brendan McKay, chief advocacy officer of the Broker Action Coalition, added that many FHA borrowers are still paying their premiums even though they have built enough equity so the government has no foreclosure risk.

"FHA is holding over 400% more in reserves than required, and it's time to turn off the faucet," McKay said.

The current rule disproportionately impacts first-time, low-income and minority home buyers, added Marc Morial, president and CEO of the National Urban League.

"By aligning FHA with private mortgage insurance practices, this legislation ensures fairness, reduces unnecessary costs, and helps homeowners build equity more quickly," Morial said, adding it's "a meaningful step toward addressing the nation's housing affordability crisis and closing the racial wealth gap."