Supporters of Federal Housing Administration reforms are using a new Congressional Budget Office report to bolster their claims that Congress needs to pass legislation that allows the FHA to charge risk-based premiums.Compared with private mortgage insurers, the Federal Housing Administration is grossly underpricing its mortgage insurance -- by 50 basis points -- and subsidizing homeowners, according to the CBO report. The report shows that the FHA charges a mortgage insurance premium of 73 bps for all borrowers, while the private MIs charge risk-based premiums ranging from 109 bps for prime borrowers to 287 bps for subprime borrowers with credit scores of 575-599. (Premiums are based on what a borrower would pay annually over eight years.) The CBO estimates that the FHA should charge 123 bps for prime and subprime borrowers under its current premium structure. But this would put the FHA at a competitive disadvantage in attracting prime borrowers, who account for 63% of its business. The CBO report demonstrates that "FHA's current one-size-fits all approach overcharges the majority of its borrowers and undercharges borrowers of higher risk," the National Association of Realtors said.
