As HUD Considers Mortgage Insurance Premium (MIP) changes following FHA’s record performance for FY2021 with $100 billion in capital reserves and an 8% capital ratio, it’s time to s tackle the ‘elephant in the room’. Since the housing crisis, FHA’s bounty policy has been more effective at “providing space for private capital” (as HUD called it in its fiscal year 2011 report to Congress) than at providing l Equity and Equity to FHA Borrowers.
Instead of increasing the initial premium to minimize the impact on FHA borrowers, HUD took the unprecedented step of significantly increasing the annual premium and later adding the loan life requirement. Together, they make it harder for borrowers to qualify, more expensive for each year the loan remains in force, and most importantly, send a clear message to mortgage originators to avoid recommending FHA financing if possible.
The growing importance of the FHA “to fill the void left by shrinking private capital,” as HUD also put it in the fiscal year 2011 report, had created a dilemma for those in Washington worried about growing market share. of the FHA. In the 2011 fiscal year report, HUD explained its “challenge” this way:
“One of the challenges we face in the current environment is the balance between ensuring the flow of mortgage credit for low-to-moderate income households, minorities and first-time buyers and provide space for private capital to return to assuming mortgage credit risk. [bolding added]
The problem with HUD’s solution to “provide space for private capital” was not that it increased FHA premiums. The MIP increases were necessary at the time to ensure the actuarial soundness of the FHA. What is disappointing is how HUD did it and the fact that these policies, to a large extent, remain in effect today.
Between 2010 and 2014, the FHA increased annual premiums by 145%. Even with the 50 basis point cut in January 2015, current annual premiums are still 50% higher than before the housing crisis ($70 more per month on average for FY2021 issuance). For borrowers who got FHA loans last year, they’re paying an extra $1 billion in the first year alone because of the higher monthly MIP.
In June 2013, HUD went further in its efforts “to provide space for private capital” by adding the loan life requirement. This change increases “lifetime” premium costs for borrowers unable to refinance their FHA mortgages over $50,000 on a $200,000 FHA mortgage.
To make matters worse, this “lifetime” burden will likely fall disproportionately on families of color. A June 2021 study from the Federal Reserve Bank of Boston found that minorities are “much less likely to refinance to take advantage of sharply falling interest rates.”
The loan life change is also detrimental to the FHA Fund because it creates a strong incentive for borrowers to refinance the program as soon as possible, costing the FHA billions of dollars in premium income. The FHA recovery rate (i.e. the percentage of loans that prepay and come back as an FHA refinance) has fallen since loan life was implemented, from from more than 50% during the 2010-2012 period to 18% during the first four months of the 2022 financial year.
Let’s also not forget who FHA borrowers are. Eighty-five percent of FHA buyers were first-time homebuyers, and borrowers of color secured more than 40% of FHA loans in fiscal 2021. FHA also insured more twice as many loans to black and Hispanic borrowers last year as the rest of the mortgage. combined market.
Loan term policy has always been at the heart of the FHA premium debate. Proponents argue that the FHA should charge premiums as long as the loan remains in effect. They act as if charging monthly premiums for the life of the loan is the only way the FHA can protect the fund and the taxpayer from the “tail risk” of loans in default after more than 11 years of payments by borrowers. .
They must have forgotten that the private sector counterparts of the FHA offer several upfront bonus plans and that the Reagan administration even introduced a upfront bonus only into the FHA program in 1983.
Of course, the loan life requirement discourages borrowers from getting FHA loans in the first place. Just look at the marketing materials from private mortgage insurers highlighting the cancellation feature of their insurance.
I understand the position of private mortgage insurers, because much of their competitive dilemma is dictated by the pricing policies of Fannie Mae and Freddie Mac. I simply don’t believe that FHA borrowers who are already facing their own financial difficulties should be required to bear unnecessary and significant financial costs in an effort to “provide space for private capital.”
Instead of the FHA charging high annual premiums for the term of the loan, mortgage insurers and their allies should direct their efforts to the source of the problem, namely the Federal Housing Finance Agencypricing policies (FHFA) and Loan Level Pricing Adjustments (LLPA) in particular. Acting Director Sandra Thompson said the FHFA will look at the awards “holistically.” This is encouraging, but regardless, families using FHA funding should no longer fall victim to this debate.
We are already seeing proposals encouraging further targeting of any PMI cuts. Targeting would only deprive excluded borrowers of the premium reduction they deserve and would also increase the risk to the Fund.
It is important to remember that the FHA was founded on the fundamental principles of insurance. Like any successful insurance program, the FHA must allocate its risks. At the same time, a cornerstone of the FHA program has always been to charge all borrowers the same premium, in part to discourage borrowers with lower risk factors from using the program. However, to the extent that these low-risk borrowers use FHA financing, their premiums certainly help offset projected losses for loans with higher risk characteristics (i.e., cross-subsidies).
As Housing Wire recently reported, FHA performance has improved further since the FY 2021 report was released to Congress. Serious chargebacks were down more than 20% in the first four months of fiscal 2022 in addition to a drop of 305 in fiscal 2021. FHA could now pay a claim for each serious chargeback and dispose still $70 billion in capital reserves and a capital ratio of 5.5. % or more than 2 ½ times the legal level of 2%.
For more than 10 years, the FHA has charged very high annual premiums on arguably its best credit quality portfolio in at least 50 years. Gone were the seller-funded down payment relief loans that cost the fund more than $16 billion and the low average FHA credit scores on the eve of the housing crisis that hit a low of 630. for fiscal year 2007. The strong appreciation in real estate prices over the past two years has only improved the FHA’s financial performance.
From day one, the Biden administration has made homeownership a cornerstone of its efforts to close the racial wealth gap in our country. Eliminating the loan term and lowering the annual premium will not solve all the problems facing underserved borrowers, far from it. They will simply remove unnecessary costs for millions of FHA borrowers who already face enough challenges in pursuit of their American dream.
Brian Chappelle is a partner at Potomac Partners and former director of single family development at both FHA and HUD.
This column does not necessarily reflect the opinion of the editorial staff of HousingWire and its owners.
To contact the author of this story:
Brian Chappelle at [email protected]
To contact the editor responsible for this story:
Sarah Wheeler at [email protected]