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Mortgage industry divided over further cuts to FHA insurance premiums

Now that the Federal Housing Administration’s insurance fund has rebounded, some mortgage lobbyists say it’s time for the Obama Administration to cut the FHA’s mortgage insurance premiums for the second year in a row — but not all agree.

In the wake of FHA volumes and loan counts surging in 2015 rather than suffering, some of the industry's largest trade groups say there is no good reason to lower the premiums right now. Such a move, they say, will only put added stress on the insurance fund, which unexpectedly saw its capital reserves climb above the statutory minimum of 2 percent last year.

“There is no need to cut the MIP [mortgage insurance premium] at this point,” said Ron Haynie, a senior vice president with the Independent Community Bankers of America (ICBA). “There just isn’t. There is nobody saying that we can’t qualify borrowers because of that.”

So far, the Obama administration has hinted that it won’t pursue another cut in 2016, a presidential election year where changes to the FHA loan program would be politically controversial.  FHA head Ed Golding told reporters in November that nothing was on the table.  Some trade groups that are pushing for a cut are still holding out hope, however.

“I can’t handicap how likely it is that they would do this, or how seriously they are looking at it right now,” said Scott Olson, executive director of the Community Home Lenders Association, which lobbies on behalf of nonbank lenders. “The last time there was no real public indication that they were seriously looking at it.”

In January 2015, the administration announced it was lowering the annual insurance premium by 50 basis points to 0.85 percent, a move that originators say boosted interest in the program significantly. FHA loan counts rose by 42 percent in 2015 compared to 2014. Reverse-mortgage counts also rose by 12.3 percent compared to the 2014 numbers.  

Olson said the administration has no reason not to lower the premiums. Credit scores of the average FHA borrower strengthened slightly in 2015, and serious delinquencies declined to 5.86 percent, the lowest level since last decade's financial crisis.   

“The evidence from the last move was that it was extremely successful in terms of creating more volume; that is, making loans more affordable to borrowers,” Olson said. “We already know that this worked. The second part of that is that the fundamentals of FHA are strong.”

Groups that support a cut want an additional 30 basis points reduction to the annual premium, but some also would like a 25 basis point cut in the upfront fee. These changes would bring premiums back to the precrisis level.

Community Mortgage Lenders of America Executive Director Glen Corso said if FHA reduces its premiums, it may indirectly strengthen the insurance fund by attracting more creditworthy borrowers. He said higher premiums were driving people with stronger credit to look for alternatives to the FHA, and therefore the program was attracting only the riskiest borrowers.  

“You have to be careful that you don’t raise your premiums to the point where you are only getting the worst risks because they don’t have anywhere else to go,” Corso said. “I don’t think that is the case now, but they have to be cognizant of that fact always.”

Bad time for another cut?

Others say a cut would only put the insurance fund at risk. Mortgage Bankers Association President David Stevens said a swing in the FHA’s home-equity conversion mortgage program (HECM), also known as a reverse mortgage, boosted the reserve to its required minimum level.

“Clearly the forward book is below the 2 percent capital reserve threshold and HECM volatility these past several actuarial reports should give pause to any short-term effort to move on premium which, in my opinion, is the right strategy,” Stevens said in a prepared statement.

The ICBA’s Haynie said the fund  is still in a weak position at the minimum statutory level. He noted that the volatility of the stock market and rapidly dropping oil prices are concerning. A downturn in the economy or in a few states with oil-dependent economies might mean FHA defaults could rise again.

“FHA mortgages typically have a higher delinquency rate than conventional loans,” Haynie said. “It is a higher-risk product for borrowers that are higher credit risk. I am not saying they are bad folks, but when somebody loses their job, that is a tough one. If their job is a specialized job having to do with the energy industry right now, that could be a big challenge for some folks.” 


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