The Federal Housing Administration’s mutual mortgage insurance fund is unlikely to need another taxpayer bailout, but that doesn’t mean homebuyers looking to finance purchases with an FHA-backed home loan will get a break on their premiums anytime soon.
To make up for a massive uptick in claims, the Department of Housing and Urban Development (HUD) hiked FHA mortgage insurance premiums six times during the the housing bust, bolstering the insurance fund’s capital position by more than $23 billion.
While real estate industry groups complained that the premium hikes were painful to homebuyers who depend on FHA-backed loans with low down payment requirements, the premium hikes still weren’t enough to maintain a 2 percent cash cushion for the insurance fund stipulated by Congress. For the first time in its nearly 100-year history, shortfalls in the insurance fund last year forced FHA to request a $1.7 billion infusion from the Treasury Department.
Now, with HUD’s annual report to Congress on the health of the fund showing it back in the black, the National Association of Realtors and other housing industry groups are pushing for a rollback of FHA premium increases.
“Now that the MMI Fund is on a path to recovery, NAR urges FHA to lower its annual mortgage insurance premiums and eliminate the requirement that mortgage insurance be held for the life of the loan,” NAR President Chris Polychron said in a statement. “Achieving homeownership has become more difficult with current FHA mortgage insurance premiums.”
NAR claims that FHA premium increases priced nearly 400,000 borrowers out of the housing market in 2013. In the past four years, NAR said, the share of first-time buyers using FHA-backed loans shrank from 56 percent to 39 percent.
FHA — which insures payments to investors who buy mortgages bundled up into securities, not homebuyers — charges two premiums to borrowers: an “upfront” payment equal to 1.75 percent of the total loan for most buyers, and an annual premium of 1.35 percent. So a homebuyer taking out a $200,000 loan can expect to pay about $3,500 in FHA insurance premiums upfront, and $2,700 in annual premiums.
While those payments are incorporated into a mortgage loan, they can reduce the size of a loan that a homebuyer can qualify for.
In its report to Congress, HUD said that FHA premium adjustments “were among several measures taken by HUD to position FHA for quickly rebuilding the 2 percent required capital reserve ratio. With home prices still substantially below peak levels, and interest rates historically low, these premium rate increases have not unduly jeopardized FHA’s role in providing an affordable mortgage financing option for low- to moderate-wealth homebuyers.”
Raising FHA premiums not only helps shore up the insurance fund, but helps private mortgage insurers, who also took a beating during the housing bust, compete with FHA. The Obama administration has said it wants to shift some of the market share that FHA picked up from private mortgage insurers during the housing crash back to private insurers.
Speaking on background, a senior HUD official declined to predict whether FHA would adjust premiums, but pointed to the statutory requirement for a 2 percent cash cushion in the insurance fund’s reserves — something that hasn’t been achieved since 2009, and isn’t expected to be restored until 2016.