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FHA top gun won't rule out further insurance-premium cuts

The top executive of the Federal Housing Administration provided a glimmer of hope on Thursday for mortgage lobbyists calling for a further reduction in annual FHA mortgage insurance premium (MIP), but also said the agency would not consider eliminating a post-recession era requirement that borrowers hold the insurance for the life of the loan.

Testifying before a subcommittee of the House Financial Services Committee, FHA head Edward Golding did not rule out a further reduction to the MIP this year, though he said the administration “had no plans at this time” to cut the rate.  

“It is one of those things that we evaluate,” Golding said, when asked by U.S. Rep. Lacy Clay, D-Missouri, if the agency would consider a reduction based on strong projected loan profits and the improving health of the insurance fund. “It depends … on the strength of the fund, its trajectory and the needs of the housing market."

Golding was more clear in ruling out the possibility of eliminating the 2013 requirement that borrowers keep insurance for the life of the loan in the case of FHA-backed originations involving loan-to-value (LTV) ratios greater than 90 percent. Before that requirement went into effect, the insurance was dropped after the LTV reached 78 percent.   

“I am not considering a change in that,” Golding said. He added that many defaults occur years after the origination date and noted that the government-sponsored enterprises Fannie Mae and Freddie Mac charge guarantee fees for the life of the loan.

In January 2015, the FHA announced it was cutting the annual insurance premium by 50 basis points, to 0.85 percent, a move that spurred a wave of FHA-to-FHA refinances with the lower rates. Some mortgage associations have urged the agency to further reduce the premium to the precrisis level of 0.55 percent. Other major trade groups, including the Mortgage Bankers Association, says that such a move would be unnecessary and may put the insurance fund at risk.

During his testimony, Golding said the MIP cut produced better-than-expected benefits, while the costs were less than anticipated. He said the cut drew in an estimated 160,000 additional first-time homebuyers, and roughly 1 million families saved an average of $900 annually in premiums. In November, the FHA’s actuarial report said the insurance fund surpassed the mandated 2 percent reserve level.  

On Tuesday, the Obama Administration also indicated in its budget that the FHA expected to yield a profit of 4.42 percent on each new loan, and to generate more than $9 billion in profits for the fund.

“The budget came out, and it showed very strong numbers for the FHA program,” said Scott Olson, executive director of the Community Home Lenders Association, which represents nonbanks and has been calling for a further cut to the MIP.

“The budget release produces more  empirical evidence that it is warranted  because the profits are very strong, and  you could cut the premiums and still produce a multi-billion dollar profit this year,” he continued.  

Olson said CHLA also supports phasing out the requirement to hold the insurance for the life of the loan.  

“Our main take is that by the time you reach the 78 LTV level, the average borrower has paid 10 percentage points in premiums and that more than covers many times over the risk of the loan,” Olson said. “We just think it is fair at that point that it should phase out.” 


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