FHA Faces Rough Road Ahead in 2015
DEC 19, 2014 1:30pm ET
WASHINGTON — The Federal Housing Administration is facing severe challenges next year as some pressure it to lower premiums to deal with new competition from the government-sponsored enterprises, even while its insurance fund remains weak and it faces added scrutiny from GOP lawmakers.
The battle over the FHA’s future has already begun. Eighteen Senate Democrats sent a letter Thursday to the Department of Housing and Urban Development, urging it to reduce FHA mortgage insurance premiums. They were joined by industry groups which have been lobbying for months for the same goal, arguing premiums are higher than needed and are restricting access to credit.
FHA loans should be “priced appropriately to serve the agency’s mission and provide a path to homeownership for the many creditworthy families still unable to obtain affordable financing through the private market,” wrote Sen. Barbara Boxer, D-Calif., and other Democrats.
Yet the pressure comes at a tricky time for the FHA. It is facing stiffer competition from Fannie Mae and Freddie Mac as they roll out new products to customers with low down payments, the traditional market for FHA lenders.
Meanwhile, the agency’s mortgage insurance fund is still recovering from losses it sustained in supporting the mortgage market after the housing crash in 2008. The fund’s ratio is at 0.41%, still far below its statutory minimum of 2%.
That makes it politically difficult for HUD to lower FHA’s premiums because doing so would draw the ire of Republicans, which now control both chambers of Congress.
“Some in Washington are now clamoring for the FHA to lower its annual mortgage insurance premiums. But until the FHA fulfills its statutory requirement, that should be a nonstarter,” House Financial Services Committee Chairman Jeb Hensarling warned in November.
Analysts said it will be difficult for FHA to lower premiums.
“Congress is still uncomfortable with FHA lowering its premiums,” said Edward Mills, an analyst with FBR Capital Markets. They will have to “wait another year.”
Republican lawmakers have already shown their cards when it comes to any premium reduction. In passing an omnibus fiscal year 2015 spending bill, Congress blocked one of FHA’s key initiatives known as Homeowners Armed with Knowledge, or HAWK.
The HAWK program was designed to reduce FHA mortgage insurance premiums for homebuyers that completed a comprehensive housing counseling program. But the GOP inserted a rider in an omnibus appropriations bill that specifically prohibits FHA from implementing the HAWK program for at least one year.
HAWK was designed by then FHA Commissioner Carol Galante earlier this year to help homebuyers and to deflect calls for a reduction in overall mortgage insurance premiums, which are the highest in the agency’s 80-year history.
“The HAWK program could have saved borrowers thousands of dollars [in premiums] for America’s hard-working families,” FHA Acting Commissioner Biniam Gebre said in a statement after the vote. “Congress’ decision means that many families will continue to be locked out of the mortgage market, unable to buy a home or build wealth that often results from home ownership.”
If FHA moves to reduce its 175 basis point upfront premium or its 135 basis point annual premium, Republican lawmakers are likely to push back.
But many in the industry are hopeful FHA will act anyway. The Community Home Lenders Association has been calling on the agency to restructure its premiums by lowering the annual fee, which costs borrowers hundreds of dollars each month, and increasing the upfront fee, which can be rolled into the loan amount. Traditionally, FHA charged a 50-basis point annual premium.
This restructuring could be done “immediately without any revenue impact because it would increase loan endorsements,” said Scott Olson, the executive director of the group.
Olson, a former staffer for the House Financial Services Committee, argued that FHA is losing its seasoned borrowers because the annual premium is so expensive. Existing FHA borrowers can reduce their monthly payments by hundreds of dollars by refinancing into a new Fannie Mae or Freddie Mac loan as soon as they have enough price appreciation to qualify.
FHA is “losing their best loans,” Olson said.
They are also losing them at a critical time as Fannie and Freddie introduce 3% down payment loan products. The government-sponsored enterprise product present a direct challenge to FHA’s 3.5% down payment product, particularly for borrowers with higher credit scores.
The GSEs have priced their new 97% loan-to-value loans “pretty aggressively” for better quality first-time borrowers, according to David Stevens, the president and chief executive officer of the Mortgage Bankers Association, and a former FHA commissioner. “There is interest in the industry to offer that program especially since HAWK is zeroed out in the budget.”
But Stevens said the GSEs’ new product spells trouble for FHA if the federal mortgage insurance agency can’t reduce its premiums. FHA endorsed $134 billion in single-family loans in fiscal year 2014.
“It is now estimated that $22 billion of FHA purchase volume will now go to Fannie and Freddie,” Stevens said.
It will “erode the credit quality” of FHA’s mortgage insurance portfolio, he added.
As a result, Stevens predicts HUD will have to lower premiums.
“At the end of the day, FHA will lower premiums next year,” he said.
Brian Koss, the executive vice president of Danvers, Mass.-based Mortgage Network, said FHA is already being adversely selected because of its pricing.
“The GSEs are taking the best credits and leaving the FHA with the least attractive loans,” he said. “By pricing themselves out the market, their revenue will continue to drop,” making it harder to re-capitalize the fund.
Brian Chappelle, a mortgage consultant, said that the Obama administration officials, as well as industry and consumer groups, are very concerned about the low level of mortgage originations. They are looking for ways to increase access to credit.
Nearly 80% of FHA loans provide financing for first-time homebuyers and 47% finance minority homebuyers. That sounds good, according to Chappelle, but it is misleading in terms of the actual number of loans going to those borrowers. The latest Home Mortgage Disclosure Act report shows that the total purchase market is “standing below levels as far back as 1993.”
A recent HUD report shows the number of FHA loans made to first-time homebuyers has declined 44% since 2010 and it is 30% below the level in 2000.
Chappelle expects the low level of purchase mortgage originations will drive policymakers to lower FHA premiums.
“I think Fannie and Freddie are going to lower their guarantee fees too,” said Chapelle, the co-founder of Potomac Partners.
So far, however, HUD isn’t saying what its plans are.
“FHA has made no decisions regarding the premiums,” Cameron French, HUD’s press secretary, told American Banker on Thursday.
If HUD decides to lower premiums, it may opt to wait. The recently passed omnibus spending bill only funded the Department of Homeland Security through March 31. As a result, a new spending bill will have to be passed, giving GOP lawmakers a chance to rollback any FHA premium reduction.
Still, the MBA’s Stevens said a reduction will prove necessary.
“There is a growing agreement that FHA’s premiums are higher than what is needed and that cost is being transferred to homebuyers, many of whom are first time and minority homebuyers,” Stevens said.