New, higher premiums on Federal Housing Administration-backed mortgages are meant to protect the government-backed program from the growing risk of losing money from loan defaults. But it will also make FHA mortgages more expensive, a key issue for homebuilders, where as many as 60% of new homebuyers use these types of loans to make their purchase.
In a report released by Credit Suisse, the tougher and costlier FHA-insured loans will hurt affordability and reduce the buyer pool—especially among first-time buyers—when the higher premiums arrive.
Beginning April 18, the FHA will increase premiums 25 basis points to 115 bps for mortgages with loan-to-values above 95%.
In addition, higher-downpayment requirements would likely be damaging to builders that have focused on the low-end market, where buyers struggle to reach the 3.5% minimum, wrote lead analyst Daniel Oppenheim—though he noted that “from a policy perspective, it is tough to argue against raising downpayment requirements from current levels.”
The historically low mortgage rates seen throughout last year have allowed families with incomes of $50,000 to buy $200,000 homes, but these buyers often have difficulty with the downpayment, the analyst wrote.
This shift will impact builders with the greatest exposure to FHA-backed buyers—including KB Home, Richmond American Homes and Ryland, where 62% to 72% of their customers bought homes with FHA mortgages in 2010.
Other builders, like Beazer and D.R. Horton, have similar exposure Credit Suisse said, because of the builders’ low price point, $200,000 and $209,000, respectively.
In contrast, high-end builder Toll Brothers is less exposed, because of its $586,000 average selling price and average customer downpayment of 30%.
Credit Suisse projects the FHA will increase the minimum downpayment to 5%, an increase of $3,000 on a $200,000 home. In addition, the report projects that the FHA will likely over time increase monthly premiums further, to 155 basis points, and reduce loan limits, the later of which could come with the Oct. 1 expiration of the temporary $729,750 loan limit for government-sponsored enterprise and FHA loans in high-cost areas.
Currently, the FHA has the statutory authority to increase its monthly premium up to 155 bps, which Credit Suisse estimates could happen by 2013 or 2014.
