Premium cut needed to counter tough housing market: CMLA

Higher home prices and rising interest rates support the need for a Federal Housing Administration mortgage insurance premium reduction, members of the mortgage industry declared. It’s something the Biden Administration is still considering taking this action nearly 18 months into its term.  

The Community Mortgage Lenders Association “expresses its deep concern and disappointment that National Homeownership Month has come and gone, and FHA premiums remain too high relative to actual risk,” the group said in a July 11 letter to Department of Housing and Urban Development Secretary Marsha Fudge.

Housing advocates had expected a premium cut to happen much earlier in Biden’s tenure. HUD’s failure to act means a significant segment of low income and minority Americans, groups that the Biden Administration said they were looking to help, are unable to purchase homes, even though no actuarial reason exists to keep premiums at current levels, said Rob Zimmer, the CMLA’s director of external communications, in an interview.

“If you’re overpricing access to homeownership money, you are price redlining people out,” Zimmer said. “If they don’t make a change here, they’re redlining qualified families out of a chance to avoid ever escalating rents.”

Following Julia Gordon’s Senate confirmation in May, a group of nonbanks, spearheaded by the Community Home Lenders Association, sent a letter to the new Federal Housing Commissioner calling for a 30-basis-point reduction in the monthly mortgage insurance premium. The letter also called for Gordon to end the rule requiring that borrowers maintain the FHA policy throughout the life of the loan.

In comparison, private mortgage insurance is cancellable at the borrower’s request when the loan-to-value ratio reaches 80% under the federal Homeowners Protection Act. It is automatically canceled at a 78% LTV.

The CMLA did its own simple stress test on the FHA’s book of business, which expects $39 billion of losses related to seriously delinquent loans. In its fall 2021 report, the FHA disclosed approximately $100 billion in reserves.

That means FHA is over-reserved, Zimmer said. Besides calling for termination at a 78% LTV, CMLA wants to drop the upfront premium, paid at closing, by 25 bps from its current 175 bps.

Brian Chappelle, a former FHA career official in the 1980s and a founding partner at Potomac Partners, thinks HUD should lower the monthly premium to 50 basis points like it was prior to the financial crisis — even if that means raising the upfront premium.

But he agreed with Zimmer and the CMLA analysis that the mortgage insurance fund has enough reserves, especially at its current capital ratio of 8%.

When the Obama Administration attempted its 25 basis point MIP cut in January 2017, the FHA had reserves of roughly $30 billion with a capital ratio of about 2.3%, Chappelle said. That action was put on hold by President Trump during his first day in office.

“It is a given that FHA must charge adequate premium to protect the Fund and the taxpayer,” Chappelle said

But it needs to be done in a way that minimizes the impact on the borrower as much as possible, and that’s why more of the premium should be shifted to the upfront portion and the monthly payment reduced, as the majority of FHA borrowers have incomes lower than the area median, Chappelle continued.

Chappelle also agreed with those calling for the end of the life of the loan requirement. Besides being a selling point for the private mortgage insurers, its existence has hurt the FHA’s recapture rate, the share of current borrowers who refinance into that product. 

From an actuarial perspective, that also hurts the fund by taking better positioned borrowers out of the pool. Prior to implementing the life of loan policy, FHA was recapturing about 50% of refinancing borrowers; that is now down to about 13%, Chappelle pointed out.

“FHA is an insurance program,” Chappelle said. “And like any insurance program, it’s got to spread the risk.”

As part of serving its market, while leaving the better heeled loans to the private sector, FHA charges all of its borrowers the same premium, regardless of risk.

But “this life of loan premium is discouraging the better quality borrowers from obtaining FHA loan,” Chappelle said. And those that do, look to refinance into a conforming product as quickly as possible.

Furthermore, a study from the Federal Reserve Bank of Boston last summer found families of color, particularly black and Hispanic borrowers, are less likely to refinance as they are exposed to risk factors such as lower credit scores and higher loan-to-value ratios. “They’ll keep their loans and they’re the ones who are going to end up paying this life of loan premium for an extended period of time,” Chappelle said.

The FHA did expand its underwriting guidelines on July 7, by granting lenders flexibility when qualifying borrowers who experienced employment gaps or loss of income due to the COVID-19 pandemic.

Yet, a premium cut, which could serve a larger share of the market, is not on the table right now.

When asked, HUD reiterated past statements that it’s taking a prudent and judicious approach to pricing the government mortgage insurance program.

“This includes consideration of a range of factors, including but not limited to things like current housing market and economic conditions, mortgage affordability and the interest rate environment, budgetary implications and any trade offs within the appropriations process, and FHA’s role within the broader housing finance system,” a spokesperson said in a statement. “These factors exist within dynamic environments and a great deal has changed over the past year.”

Discussions regarding changing the premium are ongoing but HUD doesn’t currently have an announcement to make regarding if, when, or how the Federal Housing Administration may update its pricing, the spokesperson continued.

Delivering affordability to homebuyers is the program’s primary and most important mission, a senior HUD official added in a recent briefing.

“And so of course, affordability is one of the things we consider when we look across all of the costs that relate to our program, the premium being one of those,” the official continued.

But it is important to understand how the FHA’s accounting rules, its capital ratio requirements, and how the rules that govern its mission as a federal guarantee program work.

As a result, “there’s a lot of moving parts when it comes to things like premium pricing,” the official said.

If a cut was critical when mortgage rates were at or near all-time lows, “it’s much more critical now, because you’ve had this run up in prices, [plus] people are concerned about the run up in rates,” said Scott Olson, CHLA executive director. “The affordability challenges are greater than ever.”

The CMLA’s membership consists of independent mortgage bankers, community banks and credit unions, who were doing business before the Great Recession, Zimmer said. While some had repurchase requests, their track record with the program has been pretty good.

“We do a lot of FHA lending,” said Zimmer. “We know the program and do it safely.”

A 30 bp cut in the monthly mortgage insurance premium brings it back down to 55 bps, where it was at prior to the housing crisis. The last time an FHA premium cut was implemented took place in 2015, when then-HUD Secretary Julian Castro announced a 50-bp reduction.

That cut was very successful at reaching the underserved market, but Castro later rejected calls from the National Association of Realtors in 2016 to bring the premiums down to the 55 bp level.

The Mortgage Bankers Association, which at that time said it was too soon to support an MIP reduction, now is strongly advocating for one.

“It is appropriate for HUD to expeditiously examine reductions in FHA mortgage insurance premiums, which have been at their current levels for nearly seven years,” the organization said after the actuarial report was released in November.

Then in April, MBA President and CEO Bob Broeksmit noted in a blog that 80% of FHA borrowers who exited forbearance were paying their mortgages on time.

“Clearly, the residual risks to the Fund from the pandemic are subsiding,” Broeksmit said. “Simply put, when an insurance fund has resources well above what it expects to pay out in future claims, it has room to lower its premiums.”

The MBA’s Purchase Applications Payment Index for FHA loans reported a principal and interest payment of $948 per month for December 2020 originations.

One year later, as both prices and interest rates increased, that was up to $1,070. But just five months later, that has zoomed to $1,430.

It is appropriate right now to revisit the mortgage insurance premium especially given the strength of the Mutual Mortgage Insurance Fund, said David Dworkin, president and CEO of the National Housing Conference.

“But if we don’t deal with supply, we’re not dealing with the problem,” Dworkin said. “And frankly, low and moderate income consumers are not going to get the benefit.”

Allowing FHA borrowers to drop their insurance policy through ending the life of loan requirement would go much further towards improving affordability, Dworkin said.

Still, “anything we do with the mortgage insurance premium is going to get swept away by housing prices if we don’t address supply,” he continued. The laws of supply and demand are absolute, and an MIP cut only covers demand.

That is why Congress should pass the Neighborhood Homes Investment Act, which has bipartisan support, Dworkin said. If it were to become law, it would offer tax credits to attract private investment for building and rehabilitating owner-occupied homes.

“In communities all over the country, you’ve got properties that don’t appraise at the cost to repair them, or at what it would cost to build new homes,” Dworkin said. “And this tax credit will close that gap and create more affordable housing where it’s needed the most.”