FHA Shying Away from Risk-Based Pricing

The Federal Housing Administration wants to stay away from traditional risk-based pricing for mortgage insurance premiums, saying it doesn't want the government to compete against private sector MI firms. Lowering prices for the least risky borrowers could have the effect of "potentially crowding out the return of a private market" or delaying its return, HUD secretary Shaun Donovan told a congressional panel. FHA officials are planning to raise the upfront premium or the annual premium — or both. The agency will unveil details of their proposal in January. In determining the premiums, they want to employ some combination of credit scores, loan-to-value ratios and other underwriting criteria that would limit the entry of the riskiest borrowers into the FHA fund. For example, FHA might raise the down payment for borrowers with low FICO scores. "We also have to be careful about overpricing risk," secretary Donovan testified. He noted new FHA originations are "quite profitable."