Realtors Call on FHA to Lower Insurance Fees

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The National Association of Realtors estimates that the Federal Housing Administration's 1.35% annual premium stopped at least 125,000 renters from buying a home last year.

In a letter to the agency, the National Association of Realtors argued that between 125,000 and 375,000 renters would have been able to buy a home in 2013 had they not been priced out of the market by the FHA's policies.

"Now that the FHA mortgage insurance fund is on the path to recovery, NAR urges FHA to lower the annual mortgage insurance premium and eliminate the requirement that mortgage insurance is held for the life of the loan," writes Steve Brown, NAR’s president.

The FHA is under growing pressure by industry groups to lower its premiums, which began increasing in 2010 as a way to deal with mounting defaults and losses to the FHA's mortgage insurance fund.

The agency currently charges a 1.75% upfront fee, which can be rolled into loan amount, and a 1.35% annual premium. The cost of financing the upfront fee and paying the annual premium now makes up 20% of a borrower's monthly mortgage payment, according to the NAR's April 3 letter.

"On a $150,000 loan, at a 4.5% interest rate, the mortgage payment is 13% higher today than in 2008," Brown wrote.

The Mortgage Bankers Association is also raising concerns about affordability. But the mortgage group is worried that the FHA will lose its best borrowers if the current premium structure is left in place too long while the fund will end up serving the highest risk borrowers.

"In the near term, the current premium structure is pricing many creditworthy buyers out of the market," MBA chairman E.J. Burke says in an April 2 letter to Housing Secretary Shaun Donovan. "Over the long run, high premiums on relatively low-risk business expose FHA to the risks of adverse selection."

To restore affordability and financial soundness, the FHA should rebalance its premiums and replace its life-time annual premium with a "step down" mortgage insurance premium, according to the MBA letter.

"MBA analysis shows that if FHA were to adopt a policy which stepped down the [annual] MIP in year 10 of the loan, reducing it to 60 basis points for the balance of the life of the loan, the net present value of cash flow to FHA would remain positive under conservative assumptions," the April 2 letter says.

In mid-February, the Community Home Lenders Association also urged FHA to reduce the annual premium.

"We think it is time to ease up on the heavy annual premiums that are becoming a drag on home purchase affordability," said Scott Olson, the group’s executive director.

CHLA suggested that the agency could increase its 1.75% upfront fee as a way to continue to recapitalize the FHA Mutual Mortgage Insurance Fund. The MBA and NAR also support a rebalancing approach.

"It is possible to increase the upfront premiums and lower the annual MIP and continue to replenish the MMI Fund," Brown says.

The FHA annual premium is now 80 basis points higher than in 2010 when it was 0.55%. NAR economists estimate the increased fee pushed 1.45 million to 1.65 million renters over the mortgage debt-to-income ratio allowable under the FHA program. (The FHA allows a maximum mortgage DTI ratio of 31%. The average DTI ratio on FHA loans is 28%.)

FHA endorsed 677,500 home purchase loans in calendar year 2013.

The agency does not currently appear to be interested in restructuring FHA’s mortgage insurance premiums. It is putting most of its efforts into creating a new housing counseling program called HAWK (Homeowners Armed with Knowledge).

FHA plans to roll out a HAWK pilot program next fall that would offer upfront and annual premium reductions or "incentives" to borrowers who go through the housing counseling program.

"We think that is a really good way of targeting financial incentive and making FHA more affordable to more people while at the same time protect FHA from default," said FHA Commissioner Carol Galante in a recent interview.

In addition, the FHA is revamping it quality control program so lenders have a firmer understanding of FHA underwriting standards and are more comfortable in offering loans to more borrowers.

"FHA is committed to pursuing initiatives that facilitate access to credit in a way that appropriately balances the needs and obligations to the fund," said FHA spokeswoman Addie Whisenant. "The work on FHA HAWK and Quality Assurance Framework are two recent examples of initiatives designed to do that."

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