New commissioner, same uncertainty about FHA premiums
WASHINGTON — Brian Montgomery is more than two weeks in to his second go-round as head of the Federal Housing Administration, but the agency appears no closer to a final decision on whether it will reduce mortgage insurance premiums.
Montgomery has taken the helm nine years after he left the same job. He faces a lengthy agenda, including how to modernize the agency’s 1960s-era operating system and what the FHA’s role would be in a reform framework for the country’s housing finance system.
But perhaps the biggest question for lenders and others in the housing industry is whether he will revive an Obama-era proposal to cut premiums by 25 basis points, which President Trump suspended on his first day in office.
To some, the writing is on the wall that a premium cut is still unlikely, with the FHA recently having taken a capital hit from reverse mortgage and signs that the administration may want to reduce the FHA's footprint. But to others, it is still a guessing game whether Montgomery will look at a premium cut.
“I really can’t say whether he will or whether he won’t,” said Ed Wallace, the executive director of the Community Mortgage Lenders of America. “I don’t know if he will approve it, or say no or look at it from the midpoint.”
Montgomery previously served as FHA commissioner under the Bush administration from June 2005 until 2009, during which he was instrumental in the enactment of the FHA Modernization Bill, which increased loan limits, updated down payment assistance options and established a risk-based premium structure.
“It’s not his first rodeo,” said David Dworkin, the president and CEO of the National Housing Conference. “He knows how hard this is, and he can balance his agenda with the lessons he’s already learned the first time around.”
After Montgomery's Senate confirmation last month, some industry representatives urged him to reconsider a premium reduction.
Reducing the annual premium from 0.85% to 0.55% "would restore annual premium levels to the levels in place prior to the 2008 housing crisis and would build on the January 2015 annual premium cut from 1.35% to .85%," the Community Home Lenders Association wrote in a May 30 letter to Montgomery. "That previous premium cut was highly successful, as noted in HUD’s 2015 'Annual Performance Report.'"
But in its 2017 annual report to Congress, HUD reported that the FHA’s capital reserve ratio dropped to 2.09% in fiscal year 2017, compared to 2.35% in 2016. The decrease reflected losses in the agency’s reverse mortgage program.
If the premium reduction proposed in the last weeks of the Obama administration hadn’t been suspended once Trump took office, the FHA estimated that the capital ratio would have fallen below the required 2% and would have landed at 1.76%.
“That was a very impactful, and I think, an important and right decision,” said senior adviser to HUD Secretary Ben Carson, Adolfo Marzol, at an American Action Forum event Monday, about the decision to suspend the premium cuts indefinitely.
That capital hit has fueled expectations that the Trump administration is not interested in reviving a discussion about price cuts.
Jaret Seiberg, a policy analyst at Cowen Washington Research Group, said in a recent note that adding to the FHA's financial concerns were FHA losses from hurricane damage in Puerto Rico.
"We see the new commissioner as committed to keeping the fund safely above 2%. So the idea that he would cut rates even if they could produce an analysis suggesting the fund would remain above 200 basis point strikes us as unlikely," Seiberg wrote.
Before any decision is made, the FHA needs to ensure the Mutual Mortgage Insurance Fund is "healthily above the statutory minimum," said Pete Mills, a senior vice president at the Mortgage Bankers Association.
"I think they're flagging some risks that they're concerned about, and until they understand those better, I wouldn't expect to see any move on a premium reduction," he said.
Dworkin said establishing appropriate pricing levels will probably be a longer-term process.
“If the fund isn’t strong enough to lower the premiums now, then [FHA leadership] needs to identify the specific reforms that are needed that will strengthen the fund so that they can be lowered in the future,” he said.
However, the FHA is working on reforms to the reverse mortgage program, which could make up for some of the losses in the program, Dworkin added. The agency will also need to decide whether premiums should be eliminated once equity reaches a certain level.
“We will need to know what the impact would be on the fund, and we’ll have to have a policy debate over whether or not it makes sense to reward people for building equity in their homes over reducing the cost of the mortgage in the first place,” Dworkin said.
One area in which Montgomery will be “very proactive” in is technology modernization at the FHA, Wallace said. On Monday, Marzol described FHA as being in “the Dark Ages” thanks to its mainframe-based computer operating system.
“We can’t continue to kick this can down the road,” said Dworkin. “Ultimately, improvements in their technology and their loss mitigation and in their underwriting will all contribute to creating a stronger FHA with lower premiums for everyone.”