The housing recovery is being held back because first-time homebuyers with low credit scores cannot afford the high mortgage insurance premiums that the Federal Housing Administration is charging, according to a Bank of America Merrill Lynch report.
The higher premiums are helping FHA to replenish its mortgage insurance fund but it means "less available mortgage financing for the all-important first-time homebuyer segment," the mortgage strategists say in their Oct. 3 Securitization Weekly.
The report points out that premium hikes over the previous three years were needed but it has taken a toll on FHA origination volumes.
"We estimate that from the peak in May 2010, 12-month rolling FHA purchase origination volume is down roughly 50%, from $215 billion to $105 billion," the report says.
Prior to 2008, underserved borrowers could rely on FHA or subprime loans for financing. But private-label subprime loans are nonexistent today and FHA is in "retreat," the report says.
"In many ways, this issue of who will finance first-time homebuyers is the core challenge for sustaining the housing market recovery and moving measures like single-family housing starts and new home sales up from their historically anemic levels," the report says.
"Given the constraints facing FHA and subprime PLS, we have little reason to believe meaningful change to recent activity is coming anytime soon."
