FHA premium cut could offset GSE fee reductions, analysts say

A now-more-than-likely cut in the Federal Housing Administration's mortgage insurance premium could offset any impact of the reduction in the conforming market's loan level price adjustments.

This conclusion comes from stock analysts who cover the FHA's competition for high loan-to-value ratio originations, the private mortgage insurers.

The Mutual Mortgage Insurance Fund had a capital ratio of 11.11% as of Sept. 30, a report issued on Tuesday said. When it comes to a premium cut, that level of capital "is simply too high to disregard, but our view remains that any future reduction will be modest given concerns regarding the housing market, the economy, and the path to normalization," said Isaac Boltansky of BTIG

During a press call, Federal Housing Commissioner Julia Gordon, while not committing to a premium reduction, said any move would have to wait until after the fiscal year 2023 budget process.

FHA's "likeliest course" is to cut the upfront MIP by between 50 and 100 basis points coupled with a modest reduction in the annual premium, he stated.

"The FHA could conceivably announce a larger reduction of the annual MIP, or a targeted reduction based on income or borrower characteristics, but our sense is that the FHA will move cautiously on this particular fee given broader concerns in the market," Boltansky said.

At the Mortgage Bankers Association's annual convention, Federal Housing Finance Agency Director Sandra Thompson announced the elimination of upfront fees for underserved borrowers.

Several mortgage insurers said during their recent third quarter earnings calls that they expect that LLPA change to move some borrowers out of the Federal Housing Administration sector and into the conforming market.

But if FHA cuts its premium, that would "largely offset" any migration, Boltansky said. "With current mortgage rates near 7% we don't expect material volume in either channel, although we reiterate the necessity of high-LTV loans for borrowers struggling to overcome affordability."

Bose George of Keefe, Bruyette & Woods has a slightly different take.

"Historically, we have found that strong capital levels at the FHA have been viewed negatively for the MIs because of the possibility for FHA premium cuts, which would likely shift borrowers on the cusp who are currently better served by the MIs to the FHA," George said. "We acknowledge that a premium cut is a possibility given the strong capital levels at the FHA, but we continue to think the impact is likely to be limited especially given the recent reduction in LLPAs by the FHFA, which we believe should shift some higher quality volume from the FHA to the mortgage insurers."

In August 2021, George said he expected a 25 basis point cut in the MIP in early 2022. Obviously the industry is still waiting.

A 30 basis point reduction is most likely if a cut happens, which would only impact approximately 10% of MI volumes, according to KBW's analysis.

U.S. Mortgage Insurers, the organization that represents the private competition for the FHA, put out a statement of its own, saying the government agency needs to focus on its financial strength.

"Due to current economic and housing uncertainty, it is imperative that the FHA maintain a prudent approach to pricing and risk management," the statement said. "FHA should protect the short- and long-term financial health of the MMIF and position itself to support the market through the economic cycle."