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Industry split on FHA insurance-premium cuts

A nonbank mortgage trade association renewed calls this week for the government to cut insurance premiums on Federal Housing Administration (FHA) loans, but the president of the nation’s largest trade group, the Mortgage Bankers Association, says that would be a bad idea.

MBA President David Stevens said that FHA’s insurance fund still has not achieved a level of stability to warrant another reduction at this time. He’s also against removing a post-recession rule that requires borrowers to hold insurance for the life of the loan.  

FHA insuranceEarlier this week, the Community Home Lenders Association (CHLA) sent FHA head Ed Golding a letter, urging the agency to cut the annual insurance premiums to 55 basis points, the level it was before the agency increased premiums after the financial crisis. CHLA also wants the agency to rescind the requirement that borrowers typically must hold insurance until the loan is fully amortized.  

In January 2015, FHA lowered the premium by 50 basis points on most loans to the current level of 85 basis points. In 2013, FHA added the requirement that borrowers hold insurance for the life of the loan. Before then, borrowers could drop insurance after the loan balance dropped to 78 percent of the home’s value in most circumstances.

CHLA Executive Director Scott Olson wrote that FHA's Mutual Mortgage Insurance (MMI) Fund has stabilized, and originations were boosted tremendously by the 2015 insurance cut. FHA is typically the first choice of first-time homebuyers, and the program is generally more flexible and accepts lower credit scores. Olson argued that recent surge in FHA originations as a result of the lower premiums did not weaken the insurance fund, but strengthened it.

Last year, the insurance fund’s capital reserve ratio exceeded the federally mandated level of 2 percent. As critics of another cut point out, however, the MMI Fund’s capital reserve ratio was only boosted over the top by the strong performance of reverse mortgages in FHA’s Home Equity Conversion Mortgage (HECM) program. The ratio was below 2 percent when HECMs are excluded.

“Given that the MMI Fund remains below 2 percent for the single-family book, and only exceeded 2 percent for the entire portfolio because of a large increase in the HECM valuation last year, it would be unwise to implement another round of reductions in FHA annual premiums at this time,” MBA's Stevens said. “After all, maintaining financial soundness through a sufficient level of capital in the MMI Fund ensures the long-term viability of the program.”

Stevens also said ending the life-of-loan requirement wouldn’t help borrowers with the initial payment, but would create unnecessary risk after the insurance was canceled.

“MBA has advocated for a step down of the MIP [mortgage insurance premium] after a sufficient period of time that the risk has been reduced,” Stevens said. “Finally it’s important for the industry to remain responsible stewards to protect against an overreaction by not putting the fund at risk of going negative again.”

FHA will report back next month on the health of the insurance fund when it publishes the annual actuarial report. Other trade groups that support further insurance cuts are waiting for that report before taking a position on premium levels.

“Since the annual actuarial report on the FHA fund is due to be released next month, it would be appropriate to wait to see the results of that report before taking action on the premium,” said Glen Corso, executive director of the Community Mortgage Lenders of America. “If that report is as positive as we believe it will be, then it would make sense to reduce the annual premium and lift the life-of-loan requirement.” 


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