Private mortgage insurers serving homebuyers making small down payments won’t face more intense competition from FHA loan programs, at least for the time being.
The Biden administration’s incoming Secretary of Housing, Marcia Fudge, notified Congress Tuesday that the department of Housing and Urban Development has “no near-term plans to change FHA’s mortgage insurance premium pricing.”
That’s good news for private mortgage insurers who compete with FHA by offering lower premiums to borrowers with good credit scores. Most conventional loans require homebuyers making down payments of less than 20 percent to pay for private mortgage insurance.
But it’s bad news for homebuyers with less than stellar credit who don’t have much saved up for a down payment, because FHA loans may offer lower interest rates than conventional loans with private mortgage insurance. And homebuyers can often qualify for an FHA mortgage just two years after declaring bankruptcy and three years after a foreclosure (see “7 facts about FHA loans you should know”).
FHA lenders can afford to take a few more risks with homebuyers making small down payments, because they’re largely insured against losses by the government. But the FHA’s Mutual Mortgage Insurance Fund, which compensates lenders, is supposed to be self-sustaining.
So when the 2007-08 housing crash put many FHA borrowers in foreclosure, FHA premiums went up. Upfront premiums soared from 1.5 percent of the mortgage balance before the housing crash to 2.25 percent in 2010. Annual premiums increased from 0.5 percent to 1.35 percent in 2013.
As housing markets recovered and the FHA’s finances improved, the Obama administration reduced annual premiums to 0.85 percent in 2015. But borrowers still typically pay FHA upfront premiums of 1.75 percent (see Urban Institute report).
With the FHA’s finances continuing to mend, there’s been much talk of bringing FHA premiums down again. The National Association of Realtors, for example, “strongly supports” legislation to reduce FHA premiums.
In its quarterly report to Congress this week, HUD said there’s more than $80 billion in the FHA’s Mutual Mortgage Insurance Fund — well above the mandated 2 percent minimum capital reserve. But with the pandemic’s impact on homeowners still uncertain, Fudge said a cautious approach is warranted for now.
“Through the pandemic, the FHA portfolio has experienced increased levels of seriously delinquent loans and a heightened level of loans in forbearance,” Fudge said. “We continue to monitor mortgage performance trends within our portfolio, particularly related to those homeowners who are struggling financially because of the pandemic.”
Bob Broeksmit, president of the Mortgage Bankers Association, issued a statment commending the decision “until we have a clearer picture of the long-term impact of the pandemic on FHA borrowers and the insurance fund.”
“While it is desirable to have lower mortgage financing costs, particularly as rates rise and home prices continue to increase, we agree with HUD that we need more data about how the more than 1 million FHA loans that are delinquent perform as they exit COVID-19-related forbearance,” Broeksmit said.