Pressure Building on FHA to Cut Premiums Again
A financial report due out soon could reignite a battle over whether the Federal Housing Administration should again reduce its annual premium.
The FHA last cut premiums in January 2015, a move that unleashed a lot of pent-up demand for agency-insured mortgages. While many in the industry have been urging FHA to make another cut, the agency has resisted due to concerns about its reserve fund, which rebounded last year but is still being watched carefully by nervous lawmakers.
But the agency is likely to come under more intense pressure to make another cut if independent auditors give the fund a positive review in a report due out in early November.
Many analysts expect the agency to move quickly.
The "odds favor FHA cutting premiums this fall," said Jaret Seiberg, a Washington policy analyst at Cowen & Company, in a recent report to clients.
FHA may want to be "cautious" about a premium reduction, but it is "still hard for first-time buyers and — especially minorities — to get credit."
Isaac Boltansky, a policy analyst at Compass Point, put the odds of a premium cut by yearend at 60%.
Some industry representatives aren't waiting for the results of the audit to be public. Scott Olson, the executive director of the Community Home Lenders Association, wrote a letter urging the FHA to cut the annual premium from 85 basis points to 55.
The last premium cut "made it possible for 75,000 new creditworthy borrowers to purchase homes in the first eight months," he wrote. "Assuming the 2016 actuarial report continues to show strong financial performance, with an increase in FHA's net worth — CHLA believes it is appropriate and essential to provide for a further annual premium reduction to improve homeownership affordability."
Helping his case is a Federal Reserve Board research report that shows the 2015 FHA premium reduction boosted home buying without stealing customers from private mortgage insurance companies.
"We provide evidence that the resulting rise in FHA market share reflects, in part, an increase in the overall volume of lending, as opposed to simply a shift from private insurance into FHA insurance," the Fed researchers said. "We suspect that the immediate increase in lending occurred because the MIP reduction improved applicants' debt payment to income ratios and thus their chances of credit approval."
Olson said in an interview that the research appears to "confirm that the prior premium cut generated new loans as opposed to taking market share from other lenders or the PMIs.
"So you are not taking market share. You are producing new loans for these targeted borrowers," he said.
The analysis also shows that premium levels have an impact on borrower eligibility, according to mortgage consultant Brian Chappelle.
"The positive news around a premium cut would also generate interest from families who didn't think they were eligible," he said.
But not everyone agrees another premium cut will have the same result as the last.
Laurie Goodman, co-director of the Housing Finance Policy Center at the Urban Institute, argues that FHA lenders remain wary of borrowers with low credit scores. They are also "petrified" of getting sued by the Justice Department under the False Claims Act for triple damages if FHA loans go bad. The average credit score of a FHA borrower is 680.
It is also "very, very costly" and time consuming to service FHA loans that go into default and end up in foreclosure, she said.
Lenders have put in a lot of overlays on top of the FHA credit box, which is the "main impediment to access to credit. It is not price," Goodman said Tuesday during a briefing with reporters.
"I would argue at this point, reducing the premiums on the FHA side do very, very little," she said.
Republican lawmakers may also seize on any further FHA reduction. Department of Housing and Urban Development Secretary Julian Castro was sharply criticized by GOP members after the last premium cut because the mortgage fund was not yet above its 2% statutory level.
Whether he is willing to go further may depend heavily on the fund's level this year, after it reached 2.07% under projections a year ago.
Industry representatives appear confident the fund will remain above the minimum threshold.
"We expect the ratio for the single family program to improve, and hopefully it will be above 2%," said Pete Mills, senior vice president at the Mortgage Bankers Association. "Predicting the overall results of the actuarial is difficult. The actuaries must make assumptions regarding interest rates and home prices over the next 30 years, and small changes in these assumptions can lead to big swings in the value of the fund."
Meanwhile, the FHA reverse program, known as the Home Equity Conversion Mortgage program, is a wild card in the equation. It has traditionally proven volatile and can provoke a large change in the overall reserve ratio.
"A cut to the MIP along with HECM volatility would keep the fund on razor's edge of solvency — putting FHA in the political crosshairs should those factors combine to push the fund back below 2%," Mills said.
There may be another consideration this fall as well.
"We believe the odds favor an FHA premium cut even though we acknowledge that the likely election of Hillary Clinton as the next president opens the door for the agency to wait to act until next year," Seiberg wrote.