2101 Wilson Boulevard, Suite 610
Arlington, VA 22201
October 28, 2015
Mr. Edward Golding
Principal Deputy Assistant Secretary
Office of Housing
Department of Housing and Urban Development
451 7th Street SW
Washington, DC 20410
Dear Mr. Golding:
The Community Home Lenders Association writes to urge the Federal Housing Administration to reduce annual premiums back down to the pre-crisis level of .55% when the FHA Fund reaches a 2% Net Worth, and to restore the cessation of premiums when a loan reaches 78% of the original principal balance.
In the wake of the 2008 financial crisis, FHA dramatically raised premiums for the purpose of addressing losses incurred as a result of FHA stepping in to maintain mortgage credit as private mortgage sources exited the market. Upfront premiums were modestly increased, and annual premiums skyrocketed, going from .55% to 1.35% (for loans over 95% LTV). These increases served their function, by generating substantial profits for FHA over several years and thus building up FHA’s reserves and Net Worth.
But FHA’s statutory responsibilities with respect to the FHA Fund are not limited to just its financial condition. Section 202(a)(7) of the National Housing Act lists two “Operational Goals” for the Fund:
(A) “to minimize the default risk to the Fund,” and
(B) “to meet the housing needs of the borrowers” that the program “is designed to serve.”
Thus, FHA is statutorily required to balance these two objectives. In January of this year, as FHA finances improved, FHA took action to address the latter objective. FHA reduced annual premiums from 1.35% to .85%. As the first national association to call for a premium reduction, CHLA applauded this move, arguing that such a step would improve access to credit, while being fiscally responsible.
That is exactly what happened. As a result of the premium reduction, more qualified families were able to buy a home and existing homeowners enjoyed substantial savings through refinances. Compared to the first six months of 2014, FHA 2015 purchase volume in the same period is 24% higher and total volume is up 50%. Through June 30, FHA had endorsed 735,000 loans, almost as many as in all of FY 2014.
This improved access to mortgage credit aligned with FHA’s mission. Loans to home purchase borrowers below $150,000 increased 48% in the second quarter compared to the same period last year. And loans to borrowers with credit scores below 640 have increased 100% compared to last year.
Some critics of a premium reduction argued that cutting premiums would hurt the FHA Fund by depriving it of revenues. But even with January’s premium cut, the latest federal budget projects that FHA will make a net profit of $6.5 billion for taxpayers in FY 2016. And since lower premiums increased loan volume, the so-called “revenue loss” is being offset by increased profits from the additional loans.
Next month, FHA will release its annual Actuarial Report. FHA finances have improved steadily the last few years, and some predict that FHA may even exceed its statutory Net Worth Requirement of 2%.
“If the Actuarial Report exceeds a 2% Net Worth, CHLA believes FHA should cut annual premiums back down to the pre-crisis level of .55%.
Alternatively, if the 2% level is not reached in November, CHLA believes that FHA should use some interim method of tracking Net Worth – such as Quarterly or Semi-Annual evaluations – and should cut annual premiums to .55% when FHA’s Net Worth reaches 2%.”
We would like to point out that even with such a step, FHA “upfront” premiums would still exceed levels in place before the 2008 housing crisis, particularly for lower FICO score borrowers. Moreover, budget projections show that FHA reserves – and its Net Worth – will continue to grow substantially, even with the premium reduction CHLA is suggesting. Finally, a further premium reduction is financially responsible, in light of FHA’s strong loan performance, as evidenced by the following metrics:
- FHA’s 90+ day delinquency rate has steadily improved from a 9.92% level in January 2012 to 5.81% currently. And the dollar volume of seriously delinquent loans has fallen 37% in just 2 and ½ years – from $95 billion in January 2013 to $55 billion currently.
- FHA’s total delinquency rate is now at the lowest level since FHA started collecting 30 and 60 day delinquency data in 2006.
Life of Loan Policy
Another critically important issue affecting access to credit is FHA’s life of loan premium policy. CHLA is renewing its call for an end to FHA’s Life of Loan policy. In 2013, FHA revised its longstanding policy of eliminating the charging of annual premiums on loans that are paid down to 78% of the original principal balance. That prior policy had made FHA loans more consistent with statutory requirements for private mortgage insurance premiums. Restoring this elimination is also fairer for the borrower, since by the time a borrower reaches the 78% point, the total of FHA premiums paid greatly exceed the original risk such premiums are intended to cover. In practice, the Life of Loan policy also encourages refinances out of good quality, seasoned FHA loans into other loans that better recognize the reduced credit risk of lower LTV loans. Finally, reinstating the old policy would have a minimal revenue loss – and in fact, could even increase revenues if it averts refinancings.
For all these reasons, CHLA urges FHA to reinstate prior policy that FHA premiums cease when an FHA loan pays down to 78% of the original principal balance.
Thank you for your consideration of these requests.
COMMUNITY HOME LENDERS ASSOCIATION