With the Federal Housing Administration once again looking well-capitalized to pay future claims, mortgage lenders say it’s time to think about reducing FHA mortgage insurance premiums to help make homes more affordable.

But in an annual financial report to Congress, FHA officials warn that the FHA Mutual Mortgage Insurance fund also looked well capitalized before the 2007-09 housing bust and recession, and that its finances could once again be strained if the current housing boom fades.

While the FHA financed a record $176 billion in loans for first-time homebuyers during the year ending Sept. 30, it’s also trying to help more than 660,000 borrowers who are seriously delinquent on $110 billion in loans avoid foreclosure.

Marcia Fudge

In a foreword to the report, U.S. Secretary of Housing Marcia Fudge said she was “encouraged” to see the Mutual Mortgage Insurance (MMI) fund “remain strong and resilient through the many events of the past year,” but said FHA “will continue to closely monitor the delinquencies that remain in the portfolio” to ensure the fund remains solvent.

FHA Mutual Mortgage Insurance Fund capital ratios

Source: Department of Housing and Urban Development, “Financial Status of the FHA Mutual Mortgage Insurance Fund, Fiscal Year 2021.”

Over the last year, MMI fund capital increased by $21.5 billion, to $100.5 billion. As of Sept. 30, the MMI fund’s overall capital ratio increased by 1.93 percentage points from a year ago, to 8.03 percent — well above the statutory minimum of 2 percent.

The MMI fund dropped below the 2 percent statutory minimum from 2009 through 2014 and required a $1.69 billion bailout in 2013, leading the Obama administration to raise FHA mortgage insurance premiums.

FHA’s upfront premiums went 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, annual premiums came back down to 0.85 percent in 2015. But borrowers still typically pay FHA upfront premiums of 1.75 percent — about $6,000 on the typical $343,000 FHA mortgage.

Borrowers who want to purchase a home with a small down payment can opt instead for private mortgage insurance, which is usually required by Fannie Mae and Freddie Mac when homebuyers make down payments of less than 20 percent.

With the MMI fund at 8.03 percent, “It is appropriate for HUD to expeditiously examine reductions in FHA mortgage insurance premiums, which have been at their current levels for nearly seven years,” said Mortgage Bankers Association CEO Bob Broeksmit, in a statement. “HUD should focus on pricing changes that have the greatest impact on affordability and sustainability for borrowers, such as reductions to the annual premiums, while being mindful of the current delinquency levels in the FHA portfolio and the elevated number of borrowers who remain in forbearance.”

The National Association of Realtors “strongly supports” legislation to reduce FHA premiums.

Rather than lowering FHA premiums, the FHA’s annual report to Congress details plans to create homeownership opportunities to more borrowers of modest means, by expanding homebuyer assistance programs and providing financing for small-dollar mortgages in low-cost markets.

Where problems could arise

During the pandemic, about 1 in 5 homeowners with FHA-insured mortgages — over 1.5 million homeowners — enrolled in forbearance programs that let them put their monthly payments on hold.

By the end of September, most of those borrowers had left forbearance, but more than 387,000 remained, having not yet hit the 18-month program limit. Of those loans, 309,000 were “seriously delinquent,” meaning no payments had been made in 90 days or more. Another 350,000 seriously delinquent borrowers aren’t in forbearance.

Serious delinquencies in FHA portfolio

Source: Department of Housing and Urban Development, “Financial Status of the FHA Mutual Mortgage Insurance Fund, Fiscal Year 2021.”

Altogether, there are $110 billion seriously delinquent loans insured by the FHA, a 15 percent increase from the pre-pandemic high of $96 billion in 2012.

The FHA insured a record $342.8 billion in mortgages last year, “at a time credit was being restricted throughout much of the marketplace,” the report noted.

FHA loans by purpose, 2000-2021

Source: Department of Housing and Urban Development, “Financial Status of the FHA Mutual Mortgage Insurance Fund, Fiscal Year 2021.”

Of the 1.43 million forward mortgages the FHA insured, 59 percent were purchase mortgages, of which 84 percent were taken out by first-time homebuyers.

While the vast majority of those loans are performing well, a potential cause for concern in the event of a housing market downturn is are falling average credit scores and rising debt-to-income ratios of FHA borrowers in recent years.

Debt-to-income ratios for FHA purchase loans, 2000-2021

Source: Department of Housing and Urban Development, “Financial Status of the FHA Mutual Mortgage Insurance Fund, Fiscal Year 2021.”

From 2011 through 2019, the average credit score of FHA borrowers declined from 701 to 666, as the FHA raised premiums and borrowers with prime credit scores sought out private mortgage insurers instead.

At 43.2 percent, average debt-to-income (DTI) ratio for FHA purchase loan borrowers is up 5.6 percentage points from 20 years ago, having breached the 41 percent 2009 peak seen during the housing boom. Although DTI peaked at 43.6 percent in 2019, during the 12 months ending Sept. 30 nearly one in four (23.7 percent) FHA borrowers had DTIs that exceeded 50 percent.

That’s a cause of concern because higher DTIs increase the likelihood of default during an economic downturn. And falling home prices can make it harder to homeowners to avoid foreclosure through a short sale or deed-in-lieu of foreclosure, leading to increased lender claims against FHA’s MMI fund.

The FHA’s report to Congress stresses that changes in home price appreciation can quickly undermine the FHA’s capital reserves.

Home price appreciation and FHA MMI fund capital ratios

Source: Department of Housing and Urban Development, “Financial Status of the FHA Mutual Mortgage Insurance Fund, Fiscal Year 2021.”

Home price appreciation “is a lagging indicator that tends to overstate the health of the economy during good times and the weakness of the economy during bad times,” the report noted.

Many years of accumulated home price appreciation “can prove insufficient in the face of a sudden and severe reversal,” the report noted. During the 2007-2009 housing bust and recession the MMI fund capital ratio “collapsed from 6.97 percent to just 0.53 percent, well below the statutory minimum of 2 percent.”

Homeownership opportunities

Although the FHA isn’t signaling it’s ready to reduce premiums, it’s looking at ways to expand access to mortgage credit, including downpayment assistance and support for “small-dollar” lending in underserved markets.

“For many low- and moderate-income households, the primary impediment to homeownership is amassing the required down payment,” the report said. “FHA will explore the ways in which it can expand or enhance homebuyer assistance programs to better support underserved borrowers, particularly individuals and families of color.”

Share of FHA purchase loans made with downpayment assistance

Source: Department of Housing and Urban Development, “Financial Status of the FHA Mutual Mortgage Insurance Fund, Fiscal Year 2021.”

Ten years ago, 70 percent of FHA loans were made without downpayment assistance. When downpayment assistance was provided, it usually came from a family member (22 percent) rather than the government (7 percent).

During the year ending Sept. 30, only 61 percent of FHA loans were provided without some form of downpayment assistance, with a family member providing downpayment assistance on 23 percent of loans, and the government providing help on 15 percent of loans.

The FHA is also looking at options to increase the availability of small-dollar mortgages.

“Purchasers and owners of properties in low-cost markets often face difficulties in accessing mortgage credit, resulting in yet another barrier to homeownership for low- and moderate income borrowers,” the report said. “Therefore, FHA will explore opportunities to address the financial and operational barriers that prevent the origination of these loans.”

The FHA is also evaluating its loan underwriting policies and practices “to identify elements that unnecessarily prevent low- and moderate-income borrowers and borrowers of color from obtaining FHA-insured mortgages. FHA will explore potential enhancements that could enable more qualified borrowers to access FHA-insured mortgage financing.”

An interagency Property Appraisal and Valuation Equity (PAVE) Task Force that’s looking into appraisal bias is expected to deliver a report to President Biden early next year, and FHA officials expect the task force’s recommendations “will result in expanded access to homeownership and wealth building for minority households.”

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Email Matt Carter

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