It’s been a key question for lenders and real estate professionals who work with first-time and moderate-income homebuyers: When will FHA finally loosen up and give us a break on mortgage insurance premiums?
Now that the agency is back making money and adding to its insurance fund reserves — check out the Obama administration’s latest budget proposal — isn’t it time to start chipping away at FHA’s record-high, deal-killing insurance premiums?
Isn’t it time to stop sending creditworthy buyers to cheaper conventional financing competitors — primarily Fannie Mae and Freddie Mac — because private mortgage insurers’ premiums are more affordable?
Well, don’t hold your breath. The answer from FHA is no. Although the administration’s new budget proposal forecasts $10.2 billion in revenues for FHA in 2014 and a profit margin of 9 percent on loans endorsed in 2015 — up from 7.25 percent this year — officials confirmed to me last week that there’ll be no significant easing on fees anytime soon.
In fact, rather than reducing premiums to expand affordability, FHA plans to impose a new fee — a “quality assurance” charge on lenders participating in its programs. The purpose will be to force lenders — and ultimately their homebuyer customers — to finance a new $30 million early-detection program intended to spot potential defects in loan originations. The idea, according to FHA, is to cut the risk of penalties and indemnifications for lenders when loans later go bad.
Though the dollar amount and other details of the new fee won’t be spelled out until the agency publishes them in the Federal Register, lenders already are sharply critical of the idea. They argue that if anything, the program is likely to decrease the number of loans they offer to the “underserved” first-time and minority buyer population FHA is supposed to help.
That’s crucial given the shrinkage in FHA’s overall support for homebuyers since it started raising its premiums. It endorsed just over 700,000 new purchase loans in fiscal 2013, down from 1.1 million three years earlier.
David Stevens, former FHA commissioner and now CEO of the Mortgage Bankers Association, says the additional scrutiny upfront will encourage lenders to avoid some of the loans they’re willing to make today. That’s because under the glare of the new quality assurance probe lights, they will “see themselves at far greater risk” and play it safe when confronted with a challenging FHA application.
Brian Chappelle, a consultant to FHA mortgage lenders and principal at Potomac Partners, told me the agency wants lenders to believe “that with this program (they) will have certainty” earlier about their potential liabilities. “They think it will encourage lenders to reduce overlays (add-on fees for riskier borrowers). But I and most lenders think it will have the opposite effect.”
FHA’s only apparent concession to industry demands that it rein in its premiums is a token pilot program it calls “HAWK” (homeowners armed with knowledge). Starting sometime in 2015, FHA will begin allowing some applicants to qualify for as yet unspecified discounts on their insurance fees provided they undergo intensive counseling before and possibly after purchase.
The idea, according to FHA commissioner Carol Galante, is to reduce the agency’s risk of losses from defaults by tutoring a limited number of new buyers. In a phone discussion with lenders, Galante held open the possibility that some counseled purchasers not only would pay less upfront but possibly earn a permanent reduction in their premiums.
Ironically, Galante believes HAWK will be a major step forward. She says “the improved strengthening of the (agency’s mortgage insurance) fund allows FHA to sharpen its focus on placing homeownersip within reach of many creditworthy” applicants.
Scott Olson, executive director of the Community Home Lenders Association and housing policy director at the House Financial Services Committee when the Democrats were in the majority, thinks FHA could be doing more — much more — given what he calls its “hefty profits.” His group, composed of independent, nonbank mortgage companies, calculates that if FHA reduced its annual premiums from the present 1.35 percent to a more affordable 0.75 percent, “it will still make a profit of 7.25 percent per loan in fiscal 2015.”
By doing so and opening its doors to a wider spectrum of buyers who are creditworthy but don’t necessarily have the historically high FICO scores the agency has become accustomed to in recent years, Olson’s group estimates that FHA “would still generate an increase in net worth during (the coming fiscal year) of $9.8 billion.”
Which begs the question: If FHA could loosen up on premiums, serve more first-time, young and minority buyers while simultaneously increasing its insurance fund reserves, how come this White House isn’t pushing it in that direction?
Nobody’s talking. But speaking off the record, Obama administration officials have told me in the past that they’d like to see FHA’s market share pared back to historical levels of around 10 percent.
Ken Harney writes an award-winning, nationally syndicated column, “The Nation’s Housing,” and is the author of two books on real estate and mortgage finance.