June 7, 2019
The Honorable Maxine Waters
House Committee on Financial Services
2129 Rayburn House Office Building
Washington, DC 20515
The Honorable Patrick Mc Henry
House Committee on Financial Services
4340 O’Neill House Office Building Washington, DC 20024
Dear Chairwoman Waters and Ranking Member McHenry:
The Community Home Lenders Association (CHLA) is writing to express our strong support for H.R. 3141, the “FHA Loan Affordability Act of 2019.”
CHLA writes on behalf of our community-based mortgage lenders and also as the only national association exclusively representing Independent Mortgage Bankers (IMBs), which originate over 80% of FHA loans.
Prior to an FHA policy change in 2013, FHA borrowers were required to make annual mortgage insurance premium payments only up until the point where the loan reached a loan-to-value ratio of 78%. Under FHA’s Life of Loan policy, instituted in 2013, borrowers now are required to continue making payments for the full loan term.
H.R. 3141 would reverse this Life of Loan policy, effectively reverting to the pre-2013 policy. CHLA has long supported such a change for a number of reasons.
The FHA Life of Loan policy is discriminatory against FHA borrowers. For over 20 years, by statute, mortgage insurers are not permitted to charge mortgage insurance premiums after a borrower pays a loan down to 78% LTV. In contrast, under Life of Loan, FHA borrowers pay premiums for the life of the loan.
The FHA Life of Loan policy is unfair to FHA borrowers because it significantly overcharges them. Calculations of an FHA loan on a $200,000 mortgage at today’s rates show that an FHA borrower would pay around $19,000 in premiums by the time the loan pays down to 78%. This is almost 10% of the value of the home and many times the actuarial risk that loan poses to FHA.
However, under the life of loan policy, the borrower would also pay an additional $15,000 in premiums over the remaining life of the loan. This is a significant impediment to asset building, and results in total premiums that are wildly disproportionate to the risk a loan poses to FHA.
The FHA Life of Loan
policy is harmful to FHA’s financial performance.
CHLA members are experiencing that, in practice, current FHA borrowers are choosing to refinance into a conventional loan after a number of years (and many years before the 78% LTV is hit) – driven to some degree by the goal of getting out of an FHA loan because of the burdensome life of loan premiums. The Life of Loan factor can tilt a borrower to a refinance out of FHA and into a conventional loan, even when the savings are limited and the traditional wisdom about refinancing calculations argue against a refinance.
The result is that FHA loses many seasoned loans, along with the revenue that goes with those loans. The lost revenue from such refinances exceeds the relatively smaller revenue in the future that would be foregone by retaining the Life of Loan policy.
Our members’ anecdotal experiences are backed up by hard data. A January Core Logic report found that FHA has lost over 500,000 quality loans when “borrowers with good credit history and at least 20% home equity can eliminate their mortgage insurance premium.”
Additionally, in the four years before the 2013 Life of Loan change, FHA recapture rates ranged from 50% to 60 % – that is, more than half of refinances out of an FHA loan went back into a new FHA loan. However, since the Life of Loan policy was put in place, this percentage plummeted to a current rate of 10% to 15%. This precipitous drop since 2013 represents a significant erosion of good quality premium paying FHA loans, which is harmful to the FHA fund – a point borne out by recent FHA Actuarial reports, which highlighted these increases in FHA loan runoff.
For all these reasons, CHLA strongly urges the Committee to approve H.R. 3141.
COMMUNITY HOME LENDERS ASSOCIATION