Mortgage lenders plan to push this year to make Federal Housing Administration (FHA) loans cheaper for borrowers.
Trade groups want Trump officials to lower premiums and end a requirement that FHA borrowers carry mortgage insurance for the life of the loan. Could it happen? If past Republican administrations foreshadow what’s ahead, probably not.
Moves to expand FHA lending usually come during Democrat administrations, which lowered the annual premium twice during the Obama administration and once under the Biden administration. The premium now stands at .55%, the same as in 2008.
Scott Olson, executive director of the Community Home Lenders Association, said he’s “skeptical” Trump officials would lower premiums again; however, he said a strong case can be made to remove the life-of-loan requirement on insurance.
Olson said FHA borrowers shouldn’t need to carry mortgage insurance after the loan-to-value threshold falls to 78%. Borrowers holding conventional Fannie Mae and Freddie Mac loans can drop the insurance when they reach that threshold.
An FHA borrower carrying insurance to loan maturity was losing about $16,000 in equity on a $200,000 home, the trade group previously estimated.
“It’s overcharging people,” Olson told Scotsman Guide on Monday. “By the time someone gets to 78%, they’ve paid like 10% of the premiums, which is many times over the actuarial expected loss on every loan. So, you basically have paid enough by then.”
FHA is also losing billions in premiums as the higher costs of FHA loans incentivize the most credit worthy borrowers to refinance out of the program, Olson said.
The Mortgage Bankers Association has also been calling for the removal of the insurance requirement, pointing to FHA’s ballooning reserves.
FHA’s capital ratio, a measure of the program’s reserves and ability to cover for losses, is five times above the 2% minimum required by statute. As of the fiscal fourth quarter ended in September, the ratio stood at 11.47% and has generally risen in recent years.
This “presents an immediate opportunity for the Trump administration to reduce housing costs for low- to moderate-income Americans by reducing FHA mortgage insurance premiums,” MBA’s President Bob Broeksmit said in late January.
Critics of the program, like the conservative leaning American Enterprise Institute, however, say FHA lending needs to be dialed back. FHA delinquencies have been rising more rapidly than other loan programs, and delinquencies are now above 11%.
Ed Pinto, codirector of AEI Housing Center, said FHA is too forgiving of borrowers who default on payments only to be offered “a waterfall” of forbearance options, such as lowering payments and reducing interest rates.
“FHA, we have to call it what it is, the government’s subprime lender,” Pinto told the Scotsman Guide last week. “It took the place of subprime lending.”
But Olson said the program’s growing reserves is proof that the program is healthy.
“We certainly don’t think that the premium should be increased, and we don’t think the program should be tightened,” he said.
