FHA's strong financial showing points the way on policy
Last month HUD published its annual FHA Actuarial Report. The report shows extremely strong financial performance — with reserves against losses of $62 billion and an economic net worth-capital ratio of 4.84% for the overall portfolio. The FHA's capital ratio is the highest since 2007 and almost two and a half times the FHA’s statutory capital requirement.
This reflects the solid job the FHA is doing in meeting its dual statutory requirements to facilitate access to mortgage credit for first-time homebuyers, underserved and minority borrowers, while protecting taxpayers through prudential financial management.
During the 2008 financial crisis, when private capital all but disappeared from the mortgage market, the FHA continued insuring loans to qualified homebuyers, stabilizing the housing market.
Doing so stressed FHA insurance reserves. However, prudent program management — including significant premium hikes to balance the increased risk of loss from market uncertainty — allowed the FHA to ensure a steady flow of mortgage financing at the same time Fannie and Freddie fell into conservatorship and the Federal Reserve Banks and Treasury advanced trillions to save banks, AIG and others.
The economic rebound and related home appreciation have pushed FHA reserves to record levels — culminating in last week's strong actuarial report. The FHA’s financial metrics — measured by historically low default and foreclosure rates and relatively high average FICO scores — are also very strong.
So where do we go next? The Community Home Lenders Association, anticipating a strong actuarial report, recently wrote a letter to FHA suggesting the proper course and responding to the administration’s recent housing finance plan.
The CHLA's letter cited its support of FHA managerial improvements outlined in the plan, including more flexible pay scales for the FHA, modernizing IT, and better aligning servicer penalties for errors with their financial impact. The CHLA also expressed concern about certain loan types such as down payment assistance programs and PACE loans.
However, the CHLA letter forcefully pushed back against proposals in the plan to: (1) limit FHA loans to borrowers not served by conventional underwriting, (2) eliminate FHA loans for repeat borrowers and for conventional to FHA refinances and (3) reduce availability of cash-out refis.
The second obvious conclusion from the Actuarial Report is the FHA needs to continue the process it started in 2015 to terminate temporary premium increases put in place to shore up the FHA fund during the Great Recession. Reversal of the 2013 policy change to require mortgage insurance for the life of the loan should be the next step in this process.
Current life of loan premiums significantly overcharge FHA borrowers — largely low- and moderate-, minority and first-time homebuyers — who, by the time they reach the 78% LTV threshold, have already paid around 10% of the loan amount in premiums. The life of loan policy also accelerates Ginnie Mae prepayment speeds — a source of concern to that agency, reducing the prices of Ginnie securities that ensure borrowers receive affordable interest rates.
Some argue we can't afford to lose the revenue from eliminating life of loan insurance. We heard the same type of argument four years ago when many groups argued against a premium cut; yet the FHA insurance fund continues to get stronger.
Based on observations of the borrowers Kellum Mortgage and other CHLA members serve, we believe the life of loan policy could actually reduce FHA revenue, because borrowers refinance into conventional mortgages as soon as they can, knowing they pay 30 years of premiums under the FHA. This causes the FHA to lose premiums from these borrowers.
Influential organizations spanning the political spectrum — including the National Association of Realtors, the National Association of Real Estate Brokers, the National Association of Hispanic Real Estate Professionals, the National Community Reinvestment Coalition, the National Housing Conference and the National Consumer Law Center — support the effort to end life of loan premiums. Now, with the Actuarial Report in hand, it is time for the FHA to act to end this policy.
Given the critical access to credit role the FHA plays today, and in light of its strong financial performance, now is not the time to "reduce the FHA's footprint." My firm deals with working-class families all the time, and I can attest that FHA underwriting standards are still prudent when applied properly and the FHA is sorely needed in the marketplace.
The FHA's core mission is to provide affordable mortgage credit to borrowers not served by traditional underwriting — not to deny families affordable mortgage credit to entice the private market to do so. As the FHA program has proven highly profitable, clearly something other than profits is keeping the private market from offering alternatives to the FHA program. We should figure that out before limiting hard-working families' ability to own homes.
The FHA has played a critical role in providing access to credit without taxpayer risk. Let's keep it strong and effective.