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Real estate industry trade groups are pressuring the Biden administration to cut the annual mortgage insurance premiums homebuyers pay when taking out loans backed by the Federal Housing Administration (FHA), saying it could help ease the “severe stress” that higher home prices and mortgage rates have created for first-time homebuyers.
In a letter to the White House National Economic Council Tuesday, trade groups including the National Association of Realtors, the Mortgage Bankers Association and the National Association of Home Builders argue that the FHA is flush with cash and that delinquency rates on FHA loans have returned to pre-pandemic lows.
Lowering FHA’s annual premium “increases homebuyers’ purchasing power by reducing monthly payments and directly putting money into their pockets every month, giving them the opportunity to become homeowners and build generational wealth,” the groups said. “As economic conditions continue to worsen, reducing the MIP also allows borrowers the flexibility to spend on necessary items like food, gas, education, and other monthly bills.”
The FHA Mutual Mortgage Insurance (MMI) fund required a $1.69 billion bailout in 2013 after the 2007-09 housing bust and recession. The MMI fund dipped below a 2 percent statutory minimum from 2009 through 2014, leading the Obama administration to raise FHA mortgage insurance premiums.
FHA’s upfront premiums increased 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, or about $2,264 for the average-sized FHA purchase loan of $266,400.
FHA borrowers also typically pay upfront premiums of 1.75 percent, or about $4,662 for the average FHA purchase loan.
Those are obligations that mortgage lenders must factor in when deciding how much homebuyers can afford to borrow.
Real estate industry groups say there’s room to bring annual premiums down some more, as the MMI fund’s capital reserve ratio is at four times the statutory minimum. At 4.64 percent, the serious delinquency rate on FHA loans is also at the lowest level since the first quarter of 2020, the groups said.
“Sharply higher mortgage rates and rising home prices mean the time to act is now,” the groups said in the letter.
The Department of Housing and Urban Development did not immediately respond to a request for comment from Inman.
But in their annual financial report to Congress last year, FHA officials warned that the MMI fund also looked well capitalized before the 2007-09 housing bust and recession and that its finances could once again be strained in another downturn.
The FHA’s report to Congress notes that 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.”
Instead of lowering premiums, the FHA said at the time that it was looking at ways to expand access to mortgage credit including downpayment assistance.
“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.”
Homebuyers making small down payments 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.
The Urban Institute calculates that a borrower putting 3.5 percent down with a FICO score of less than 700 will generally find FHA financing to be more affordable, while borrowers with FICO scores of 740 and above will often get a better deal on a loan backed by Fannie Mae or Freddie Mac with private mortgage insurance.