Americans Shut Out of Housing as FHA Fees Jump: Mortgages
By Kathleen M. Howley May 7, 2014 12:00 AM ET
After two months of looking for a home to buy, Brittani Kaufman walked into a townhouse under construction in Glen Burnie, Maryland, in April.
“This is it,” Kaufman said as she scanned the three-bedroom home after a construction crew had just finished erecting the interior walls.
Kaufman, a dental hygienist, said she planned to purchase her first home with a mortgage backed by the Federal Housing Administration, whose mandate is to help lower-income buyers. Days later, she found out that the FHA since 2010 had more than doubled its mortgage insurance fees, adding $340 a month to her payments instead of $125 a month. That was a deal killer.
“I was really shocked,” Kaufman, 27, said. “I hadn’t budgeted for that much.”
The FHA boosted its fees after a surge in defaults during the housing crash depleted its capital reserves. The increases, which have helped replenish the FHA’s coffers, have also prevented hundreds of thousands of first-time purchasers from getting FHA loans, according to an estimate from the National Association of Realtors. Now groups such as the Community Home Lenders Association and NAR are calling for the agency to partially roll back and restructure the fees.
“When you’re asking young families to pay a couple hundred extra dollars every month in new FHA fees, you’re keeping a lot of them from becoming homeowners,” said Brian Chappelle, a former FHA director and partner at Potomac Partners LLC, a consulting firm in Washington. “Yes, the insurance fund needed to raise more revenue, but using the monthly fees wasn’t the way to do it.”
First-Time Buyers
The decline in first-time buyers is contributing to downturns in the housing and mortgage markets as rates rise. Lending volume plunged to its lowest level in 17 years in the first quarter, according to the Mortgage Bankers Association.
The FHA, a primary source of loans to new buyers, provided them with about 27,100 mortgages in February, according to agency data. That’s the fewest since the onset of the financial crisis and a 32 percent decline from a year earlier, the data show.
The higher fees prevented new buyers from making as many as 375,000 purchasers in 2013, NAR said in a letter to FHA Commissioner Carol Galante in April. Ken Fears, an economist for the Realtors group, said he arrived at that estimate by measuring government income distribution data and historical first-time sales data in scenarios using the old and new fees.
Tipping Point
Galante, who oversees the FHA’s $1.1 trillion insurance portfolio, disputes the claim that the new fees are keeping Americans from becoming homeowners. The current premiums correctly reflect the risks assumed by taxpayers, she said in a speech at a MBA conference last month. Any additional increases would start pricing first-time buyers out of the market, she said.
“We’re reaching a tipping point where we believe that further increases would reduce access to credit,” Galante said. “However, now is not the time to roll those premiums back. Right now we are priced appropriately and are reaching out to creditworthy individuals.”
The FHA, which was created by President Franklin Delano Roosevelt in 1934 during the Great Depression, got a $1.7 billion cash infusion last year — the first in its history. The agency needed the bailout after more than a quarter of the mortgages it insured in 2007 and 2008 went bad as housing prices plunged.
Higher Risk
FHA loans are riskier than those backed by Fannie Mae or Freddie Mac, the government-owned mortgage companies, because the agency’s underwriting standards are looser. The FHA allows down payments as low as 3.5 percent, and considers applicants with credit blemishes.
The average FICO credit score for an FHA mortgage to purchase a home was 686 in February, compared with 755 for Fannie Mae and Freddie Mac loans, according to data compiled by mortgage processor Ellie Mae. About 80 percent of FHA loans go to first-time buyers.
Starting in 2010, the FHA began boosting its monthly fees that insure mortgages to help recoup losses. It now charges borrowers 1.3 percent of a mortgage’s balance per month, up from .5 in 2010.
Raymond Baldwin, 28, pays about $450 a month in fees for the $380,000 FHA loan he and his wife used to buy a house in Sykesville, Maryland, in November. They have a nine-month-old son and a German Shepherd puppy. Before the fees rose, the couple would have paid about $150 a month.
Lifetime Insurance
“That’s $300 a month we’re not saving for our son’s college education, or going out to spend at local restaurants,” said Baldwin, a manager at Koons Ford of Baltimore.
The FHA also changed its policy to require monthly fees for the life of the mortgage. Until last year, borrowers could cancel the insurance payments after five years if they reduced their loan balance to 78 percent of the original amount. Fannie Mae and Freddie Mac borrowers can end their private mortgage insurance after the property gains 20 percent equity.
The agency’s lifetime insurance policy makes the loans even less affordable, said Dee Sodano, vice president of lending at Community HousingWorks, a non-profit group in San Diego, California, that promotes homeownership. Someone with a $275,000 mortgage who keeps it for 30 years will end up paying about $90,000 more than if they had been able to cancel the insurance after five years, according to data collected by Bloomberg.
Bye, FHA
“People are going to refinance out of those FHA loans as soon as they can, as soon as their home value rises, and say ‘Bye, thanks for the help,’” said Sodano. “The FHA could have found a happy medium by moving the target to 70 percent instead of going to the life of the loan.”
The FHA is set to regain its financial footing this year as fee increases boost revenue and higher housing values reduce defaults. The agency will have a capital reserve balance of $7.8 billion in 2014, according the Department of Housing and Urban Development, which oversees the FHA.
Now that the FHA has recovered, the Mortgage Bankers Association, the Community Home Lenders Association and NAR are pressuring the agency to reduce the cost of borrowing. In letters to HUD and the White House, the groups said the FHA should lower fees and shift the costs to the one-time premium borrowers pay at origination and that can be financed as part of the loan.
“The current premium structure is pricing many creditworthy first-time buyers out of the market,” the mortgage bankers group wrote in an April 2 letter to HUD Secretary Shaun Donovan.
Pilot Program
About 28 percent of people buying their first home last year used an FHA loan, according to Bloomberg data. Before the fee increases began in 2010, that share was 43 percent.
Sales of U.S. homes in March fell to 4.59 million at an annual pace, the lowest level since mid-2012, after dropping in seven of the last eight months, NAR said in an April 22 report. The median price of an existing home grew 7.9 percent from a year earlier to $198,500.
“You’re stripping out a lot of people when you increase FHA fees so high, and without first-time buyers it’s not possible to have a healthy real estate market,” said Richard Green, a loan officer at Presidential Mortgage Group in Bowie, Maryland.
The Obama administration’s budget proposal submitted to Congress in March includes funding for an FHA pilot program called Homeowners Armed With Knowledge, or Hawk. It will grant monthly-fee reductions to borrowers who attend housing counseling. HUD hasn’t specified when the program would start, how many buyers it would help, or the size of the fee reductions.
Expanding Access
“We believe this initiative has a double benefit of expanding access to credit but also strengthening the FHA” insurance fund, HUD’s Donovan said on a call with reporters in March.
Kaufman, the dental hygienist, said she may have to wait to buy a home until she saves more money. She’s now living with her mother near Baltimore and working 55 hours a week between two jobs.
“I’ve always wanted to own my own home, and it’s a dream I’m not going to give up on,” said Kaufman.
To contact the reporter on this story: Kathleen M. Howley in Boston at kmhowley@bloomberg.net
To contact the editors responsible for this story: Vincent Bielski at vbielski@bloomberg.net Rob Urban