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Real estate industry trade groups are welcoming a decision by the Biden administration to lower annual FHA mortgage insurance premiums on new loans by nearly 40 percent.
But the premium reductions — which are expected to save borrowers $678 million a year — don’t apply to existing loans or let homeowners stop paying for FHA mortgage insurance altogether once they’ve built up enough equity, as some housing advocates had hoped.
Last fall, real estate industry trade associations joined with fair housing and civil rights groups under the umbrella of the Black Homeownership Collaborative to ask the Department of Housing and Urban Development to not only slash FHA premiums but to drop “life-of-loan” requirements that force most FHA borrowers to continue paying annual premiums until their loans are paid.
Homebuyers who take out private mortgage insurance when buying homes with down payments of less than 20 percent can drop their insurance when they have built up a 20 percent equity stake in their homes. But for FHA borrowers making down payments of less than 10 percent, the only way to get out of paying mortgage insurance premiums is to refinance out of their FHA mortgages or sell their homes.
The 30 basis-point reduction in the FHA annual mortgage insurance premium (MIP) announced by the Biden administration Wednesday, applies only to new loans. Borrowers taking out new loans endorsed on or after March 20 will pay annual FHA premiums equal to 0.55 percent of their outstanding loan balances, rather than 0.85 percent.
To get the lower premiums, borrowers with existing FHA loans will have to refinance them which means paying an upfront premium. To be eligible, the loans they’re refinancing can’t have been taken out before June 1, 2009.
With no changes to existing life-of-loan requirements, most FHA borrowers making small down payments will be required to continue paying premiums for as long as they have their loans. Borrowers taking out FHA loans with less than 90 percent loan-to-value ratios will continue to be released from annual premium payments after 11 years.
Still, the premium reduction — announced Wednesday at an event at Bowie State University where Vice President Kamala Harris joined HUD Secretary Marcia Fudge — will benefit about 850,000 new borrowers a year, Harris said, with an initial average savings of $800 a year.
Buyers purchasing homes with FHA-insured mortgages typically borrow a little less than $270,000. But a borrower making payments on a $467,700 mortgage, the national median home price as of December 2022, will save even more — about $1,400 a year, HUD said.
Real estate trade groups including the National Association of Realtors (NAR) and the Mortgage Bankers Association (MBA) welcomed the news — as did the National Fair Housing Alliance (NFHA), an advocacy group dedicated to ending housing discrimination.
According to a White House fact sheet, more than 80 percent of FHA borrowers are first-time homebuyers and over 25 percent are homebuyers of color.
“Not only will this decrease place homeownership in range for more everyday individuals, it will help spur economic growth in communities throughout the country,” the NFHA’s Nikitra Bailey said in a statement.
“The lower premiums will expand homeownership opportunities by lowering mortgage payments for qualified FHA borrowers, providing critical relief from the steep rise in mortgage rates and home prices just in time for the spring buying season,” MBA President and CEO Bob Broeksmit said in a statement. “This will especially help minority homebuyers and low-and moderate-income households who are predominantly served by FHA loans.”
But last fall, NAR, MBA, NFHA and other groups banding together under the umbrella of the Black Homeownership Collaborative asked HUD to not only cut FHA mortgage premiums but end life-of-loan requirements.
Releasing FHA borrowers from annual premium payments after they’ve built up enough equity in their homes “would contribute to building wealth through homeownership in the Black community,” the groups said in an Oct. 12 letter.
In their official statements welcoming the premium reductions, neither NAR, MBA or NFHA mentioned whether they still hope to see HUD relax FHA life-of-loan requirements.
NAR and NFHA did not respond to requests from Inman for additional comment. But an MBA spokesperson told Inman via email that while the group supports the premium cuts — “which will provide meaningful relief to FHA borrowers” — the MBA “will continue to ask FHA to review additional pricing changes, including removing life-of-loan insurance requirements.”
HUD did not respond to a request for comment on whether it has considered revising life-of-loan requirements. But for HUD, one problem with slashing FHA premiums too drastically — or relaxing the life-of-loan requirements — is the need to maintain adequate reserves in the FHA Mutual Mortgage Insurance Fund.
The MMI Fund required a $1.69 billion bailout in 2013 after the 2007-09 housing bust and recession, leading the Obama administration to raise FHA mortgage insurance premiums.
Upfront premiums were raised from 1.5 percent of the mortgage balance to 2.25 percent in 2010, while annual premiums increased from 0.5 percent of the mortgage balance to 1.35 percent in 2013 before being rolled back to 0.85 percent in 2015.
In its 2022 annual report to Congress, HUD reported that as of Sept. 30, 2022, the MMI Fund had an 11 percent capital reserve ratio, up 3 percentage points from 2021 and 9 percentage points above the 2 percent statutory minimum.
“Shifts in the housing market in the second half of fiscal year 2022 are expected to decelerate capital accumulation in the near term,” Fudge told lawmakers in the report’s introduction. “However, the strong state of the MMI Fund will allow FHA to play its important counter-cyclical role in facilitating liquidity and access to mortgage credit for qualified borrowers should other market participants constrict their activity.”
While NAR and NFHA did not respond to requests for comment on whether they were disappointed that HUD hasn’t acted on their request to rescind FHA life-of-loan requirements, at least one industry trade group did take issue with the premium cuts.
That group, U.S. Mortgage Insurers (USMI) represents private mortgage insurers who compete with FHA and VA lending programs for business. 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.
USMI President Seth Appleton called the premium reduction “well-intended,” but warned that the move “could result in unintended consequences for both the FHA and the borrowers it seeks to serve.”
“For borrowers, FHA’s pricing action may make homebuying more challenging by driving up home prices even more and impairing the ability of low- and moderate-income, first-time, and minority borrowers to access homeownership,” Appleton said in a statement. “For the FHA, reduced premiums decrease its fiscal resiliency in an environment of economic uncertainty and volatile interest rates.”
The FHA plays an important role in promoting access to homeownership, providing countercyclical support to the market in times of stress, Appleton noted.
Private mortgage insurers regaining market share
In the aftermath of the 2007-09 housing market bust and recession, private mortgage insurers saw their market share decline from nearly 80 percent to less than 20 percent, according to data compiled by Inside Mortgage Finance and the Urban Institute.
But increases in FHA premiums in 2010 and 2013 helped private mortgage insurers like Arch MI, Enact, Essent, MGIC, National MI and Radian rebuild their market share, which climbed back through the 50 percent threshold in the third quarter of 2022.
With the FHA premiums in place today, the Urban Institute has calculated that borrowers with a FICO score less than 720 putting 3.5 percent down when purchasing a home will generally find FHA financing to be more affordable, while those with FICO scores of 720 and above will often get a better deal on a loan backed by Fannie Mae or Freddie Mac with private mortgage insurance.
In a note to clients, BTIG analysts Isaac Boltansky and Eric Hagen called the FHA premium cuts a “positive for credit availability” which are “unlikely to lead to meaningful share shift.”
That’s in part because Fannie and Freddie’s federal regulator, the Federal Housing Finance Agency (FHFA), recently ordered the mortgage giants to eliminate upfront fees on many purchase loans to help first-time homebuyers of limited means.
“From a market perspective, we view this release as (1) a positive for FHA lenders, (2) a slight but manageable negative for private mortgage insurers, and (3) a slight positive for low- to moderate-income (LMI) borrowers and firms serving that segment,” the BTIG analysts said. ” More broadly, while pricing changes will help borrowers at the margin, the dual headwinds of interest rates and supply constraints are far more impactful. Policymakers at the FHFA and FHA are turning the dials they can to support housing availability, but there is no policy panacea in their toolbox.”