Arlington, VA 22201
October 10, 2014
Hon. Julian Castro
Department of Housing and Urban Development
451 7th Street SW
Washington, DC 20410
Dear Secretary Castro:
The Community Home Lenders Association (CHLA) writes to renew its call for a meaningful reduction in the level of FHA’s annual premiums, in order to improve access to credit, and in recognition of the historically high profit levels and low default rates that FHA is experiencing with recent vintage loans.
CHLA applauds your recent speeches on homeownership – such as your comments at the Bipartisan Policy Center’s Conference in mid-September, where you said that more needs to be done to promote homeownership, and a speech just last week where you said that “homeownership is out of reach for too many Americans” and that you would “strive to alleviate the affordability crunch.”
CHLA believes that the single most effective thing that HUD could do to improve homeownership affordability is to implement an immediate reduction in the level of FHA annual premiums.
We are also mindful that FHA is expected next month to release its annual independent Actuarial Report on the FHA Fund. If recent trends hold, the net worth of the FHA Fund should improve significantly.
Assuming the FHA Actuarial Report projects that FHA’s 2% net worth target will be met no later than the end of 2015, CHLA believes it is critically important for FHA not to wait another year to reach this point, but instead act immediately to cut premiums, to make loans more affordable. This would not endanger the Fund, but merely delay for a few months the date the 2% target is reached.
As you may know, CHLA wrote OMB back in February, to call for a reduction in the level of annual premiums charged by FHA from 1.35% to .75%. Our letter also noted that a portion of the reduced profits could be partially recouped through an increase in the up-front premium, which has a much smaller impact on affordability than annual fees do. We believe the FY 2015 budget, released a few weeks later, reinforced our positon, showing a projected net profit on FY 2015 FHA loans in excess of 9% per loan. This reflects historically very high premium levels, combined with low default rates.
Since our February letter to OMB, there has been mounting evidence that high FHA premiums are hurting homeownership opportunities, particularly for minority and low and moderate income homebuyers. Just last week, Merrill Lynch issued a report which concluded that the high level of FHA premiums means “less available mortgage financing for the all-important first-time homebuyer segment.” That report echoed the points we first raised in our February OMB letter – that earlier fee hikes were needed to replenish the FHA Fund, but are now taking a toll on FHA loan origination volumes.
In fact, FHA loan volume over the first nine months of the current fiscal year was down 19% compared to the same prior year period. A major trade association released estimates that there are between 125,000 and 375,000 prospective buyers priced out of the market each year by high FHA premiums. And the Federal Reserve reported that the percentage of overall mortgage loans to minority borrowers was falling. We believe that all these objective metrics strongly support the case for a reduction in FHA premiums.
Finally, CHLA believes that such a fee reduction should be combined with constructive changes to FHA policies to help reduce unnecessary lender credit overlays – to avoid otherwise qualified FHA borrowers not receiving an FHA loan. We applaud recent FHA actions, such as the Supplemental Performance Metric to remove disincentives to lend to borrowers in the 620 to 680 FICO range, and the new Defect Taxonomy, which strives to distinguish between major and more minor manufacturing loan defects.
However, we continue to have concerns that FHA’s increased focus on manufacturing loan defects may exacerbate disincentives for lenders to originate sound FHA loans for certain types of borrowers. We believe it is critically important that FHA policies not be carried out in a way that discourages lenders from originating loans, particularly for lower FICO borrowers or self-employed borrowers. FHA guidelines and enforcement should not penalize lenders for loans to such borrowers or for underwriting “foot faults” – minor errors that are not significant in terms of credit quality or causally related to loan loss.
We thank you for consideration of these recommendations.
COMMUNITY HOME LENDERS ASSOCIATION