2101 Wilson Boulevard, Suite 610
Arlington, VA 22201
December 17, 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) is writing to renew our request that FHA take immediate action to reduce the level of FHA annual premiums. We urge this change in order to allow FHA to more fully meet its mission of affordable mortgage credit, while at the same time maintaining a steady buildup in the FHA MMIF Fund.
Specifically, the CHLA requests that FHA immediately reduce premiums on FHA loans from the current level of 1.35% down to .75% – and subsequently to a level of .55% when the FHA Fund meets its 2% net worth target. We would note, and explain just below, that a portion of the revenue loss from such action could be offset by an increase in the level of the upfront premium.
We commend the FHA for the work it has done to stabilize the finances of FHA. The just released FHA Actuarial Report shows the FHA on a steady glide-path of building up its net worth, with projections that the Fund will near the 2% net worth target in the current fiscal year and will meet that target in 2016.
However, the current annual premium rate of 1.35% is 80 basis points higher than it was just four years ago – a 145% increase in this short period of time. This large fee increase has pushed an estimated 1.45 to 1.65 million renters over a sustainable debt-to-income ratio for purchase of a home in 2013. Of these impacted renters, as many as 125,000 to 375,000 of them would have purchased a home last year had they not been priced out of the market.
The impact on FHA shows up in its declining loan volume. While first -time homebuyers comprise some 80% of FHA home purchase loans, the number of FHA loans to first-time homebuyers has declined 44% since 2010, and is 30% below the level in 2000. And, FHA home purchase lending to African Americans has declined 44% since 2009 and it has declined 38% to Hispanic homebuyers since that same year, according to HUD’s Annual Reports that are sent to Congress.
Therefore, in light of FHA’s demonstrably improving finances, it is an appropriate time to balance the practice of charging excessive premiums that effectively pay for losses related to the 2008 housing crisis with the objective of improving access to credit and increased homeownership opportunities for qualified homebuyers.
We would note that FHA could make an immediate reduction in annual premiums potentially to a level below 1% without losing any revenues to the FHA Fund – through a revenue neutral increase in the upfront premium it charges. This would enhance affordability, without affecting the FHA Fund. It would also have the impact of building up loss reserves at a faster rate, as well as reducing the loss of quality FHA loans (and their premiums) in future years as borrowers are able to refinance to non-FHA loans that don’t carry the hefty FHA premium.
However, we also believe that a more substantial decrease in annual premiums is warranted at this time, down to a level of .75% – in light of the toll that excessive fees is taking on homeownership opportunities and access to mortgage credit.
Moreover, a premium reduction can be safely carried out precisely because FHA loan quality has never been higher. Average FICO scores have risen from 640 to 680 in recent years, FHA default rates have fallen more than 25% from a few years ago, and recent vintage loans are performing well, with seriously delinquent rates falling to around 1% for loans in the last 2 years.
Finally, in closing, we would note that arresting the decline in FHA loan volume through a reduction in FHA premiums would also produce more FHA loans at a profit to the Fund – thus further reducing the revenue loss that might otherwise arise from cutting premiums. This is in addition to the option of raising upfront premiums as a partial offset to an annual premium reduction.
We thank you for your consideration of this request.
COMMUNITY HOME LENDERS ASSOCIATION