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Cut in FHA premiums likely to spur borrower interest


Mortgage originators are upbeat about a planned cut in annual Federal Housing Administration (FHA) mortgage insurance premiums. The change, they say, is likely to revitalize a program that has declined in recent years and give first-time and moderate-income mortgage borrowers a chance to buy or refinance.

The White House announced on Wednesday that it would order a 0.5 percentage point cut in FHA premiums, lowering the annual rate to 0.85 percent from 1.35 percent. President Barack Obama followed up with a speech Thursday in Phoenix touting the benefits of the cut.

“The FHA will lower its mortgage insurance premium rates enough to save the average borrower more than $900 per year,” Obama said Thursday, adding that millions would save on mortgage payments in the coming three years.

The cut will take effect by the end of January, and the mortgage industry largely cheered the move, with originators pointing out that FHA will again be able to compete with new 97 percent loan-to-value programs rolled out by Fannie Mae and Freddie Mac in December.

“This brings the FHA loan back for purchases,” CMG Financial Sales Manager Rodrigo Ballon told Scotsman Guide News. “Ever since Fannie Mae brought back the 3 percent [downpayment] conventional purchase, it was a more attractive loan than FHA … we will see a huge increase of FHA loans in the marketplace.”

With insurance premiums at 1.35 percent, the program was seen as too expensive for lower-income borrowers. That would often leave those borrowers with nowhere to turn with still-rigid credit restrictions on conventional mortgages.

“This is a great move by FHA since customers have been shocked at the cost of the [insurance premiums] and some have put off buying because of that,” George Mason Mortgage Vice President Carlos Larrazabal told Scotsman Guide News. “This will allow a lot more to refinance and lower their payments.”

No change to premiums for life

One recent FHA change that will remain in effect is the life-of-loan insurance requirement. That policy went into effect in 2013, part of a raft of policy changes — including premium hikes — to help FHA regain solvency. FHA had to seek a bailout from Congress in 2013 for the first time in its history.

Those policy changes may have gone too far, however. FHA began earning money again in 2014, and had a fund reserve of $7.9 billion by the end of the fiscal year, but program guarantees had dropped sharply.

FHA endorsed 786,225 loans in fiscal-year 2014, 42 percent less than in 2013. FHA endorsed fewer than 200,000 loans in second-quarter 2014, the lowest in four years.

Changing course

The rate cut may be evidence of the government and the mortgage industry working cooperatively to reverse the drop off in guarantees while still earning money, Wholesale Capital Corp. Senior Loan Officer Nathan Chabolla told Scotsman Guide News.

“Whatever the numbers were on the back end, Washington was looking at this and saying, ‘what happened here?’” he said. “It seems like they’re finally hearing all the cries for help. Whether this is going to be a huge deal or a flash in the pan, perception is reality and I think a lot of people are excited about this.”

FHA is still far from solvent. Congress requires it to keep a minimum of 2 percent of total guarantees in reserve, which is about $23 billion.

Chabolla said he would like to see FHA charge a higher initial funding fee rather than a recurring monthly charge because borrowers could finance it all upfront. Brian Atallian, an originator with Pike Creek Mortgage Services, suggested lowering premiums after a borrower hits an 80 percent loan-to-value ratio, similar to conventional loan programs.

“FHA had to increase its reserves, but I think in doing so they took advantage of first-time homebuyers,” Atallian said. “The increase was way too high and now FHA is trying to [compensate for] lost business and compete with [the government-sponsored enterprises].”

The GSEs’ new 97 percent loan-to-value programs likely would have siphoned off more business from the higher-cost FHA program. The GSEs do not require mortgage insurance for the life of a loan. Borrowers with lower-credit profiles likely would not qualify for those programs, however. Now, FHA can be there to scoop them up.

Implications

Some see this move as a potential problem for FHA. Loans guaranteed before the housing crash pushed FHA into insolvency in 2013. In fourth-quarter 2014, the number of borrowers with credit scores 680 and higher was declining, while scores ranging between 620 and 679 were increasing. Between 2007 and 2008, FHA saw the highest share of borrowers with credit scores 620 and below.

Stephen Oliner, a co-director at the American Enterprise Institute International Center on Housing Risk, criticized the rate-cut move, telling the New York Times Thursday, “FHA has become a large-scale government subprime lender that doesn’t charge enough to risky borrowers.” Oliner advocated for job programs instead, which would presumably lift incomes, allowing borrowers to save for downpayments.

Zillow Chief Economist Stan Humphries remarked that a change in insurance premiums would have no affect on income growth, which is what is really holding back buyers, especially young ones.

The U.S. Department of Housing and Urban Development issued a statement Thursday saying that 800,000 FHA mortgage holders would see savings each year, and over the coming three years 250,000 would be able to buy new homes using the program.

“This creates a buzz in the industry,” Chabolla said. “And not just for agents and lenders, buyers hear this and get reengaged.”



 

Questions? Contact Neal McNamara at (425) 984-6017 or nealm@scotsmanguide.com.

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