Urban Institute Tells FHA Why MIP Reduction is the Way to Go

Just days prior to the Obama Administration announcing it would be reducing mortgage insurance premiums for forward loans insured by the Federal Housing Administration, the Urban Institute urged the administration to that end.

Now that the Federal Housing Administration’s Mutual Mortgage Insurance Fund (MMI) is back in the black, it’s time to stop overcharging today’s borrowers on insurance premiums, says the Washington, D.C.-based think tank.

In an analysis this week on the 2014 Actuarial Report on the FHA’s MMI Fund released in November, the Urban Institute comments that while the Fund reported $4.8 billion in value, the results push back the FHA’s return to its congressionally mandated minimum of 2% in capital reserves to 2016.

Advertisement

The analysis also explains the shortfall on the Home Equity Conversion Mortgage portion of the portfolio, largely attributed to interest rates and an overly optimistic outlook for the value of the HECM portfolio under previous projections.

“The mixed message of the actuary—showing an agency whose business continues to improve, though not as quickly as had been expected—raises the question of whether the FHA can afford to lower their historically high insurance premiums, expanding access to credit and avoiding, at least in part, a worsening adverse selection problem,” the Urban Institute wrote.

Analyzing several different scenarios and formulas, the Urban Institute goes on to suggest that netting $2 billion to $3 billion in 2015 for the Fund is a “more appropriate pace that won’t overcharge new borrowers to make up for undercharging in the past.”

“If the FHA’s ultimate goal is to break even with each vintage, there is a room for a significant premium cut,” suggests Urban Institute.

To this end, the Urban Institute says that even if FHA succeeded in taking on a much broader book, with a greater number of higher risk borrowers and expected losses, the agency could cut annual premiums in half, from 1.35% to 0.65%, and still break even.

The analysis was published just days before Secretary of the Department of Housing and Urban Development Julian Castro released a statement confirming that President Obama would reduce FHA mortgage insurance premiums by 0.5 percentage points, from the current 1.35% to 0.85%—changes that are elected to go into effect by the end of the month.

The reduction would not apply to the Home Equity Conversion Mortgage program, a HUD spokesman confirmed to RMD.

Written by Jason Oliva

Join the Conversation (1)

see all

This is a professional community. Please use discretion when posting a comment.

  • Two things this article points out.

    The first is that Republican Congress members had every right to grill FHA Commissioner Galante on the quality of the reports she was bringing to Congress in fact they too easily let her off the hook as seen in the following: “The analysis also explains the shortfall on the Home Equity Conversion Mortgage portion of the portfolio, largely attributed to interest rates and an overly optimistic outlook for the value of the HECM portfolio under previous projections.” That is a $7.7 billion loss last fiscal year due to two things: interest rates (really?) and an overly optimistic valuation of the HECM portfolio in prior fiscal years which was not corrected until last fiscal year. That certainly does not sound good about the accountability from the hierarchy at HUD in the Obama Administration (the only Presidency which has reported on the HECM part of the MMI Fund since such reporting began upon the initial accounting for HECMs in that fund on 10/1/2008). With little change in interest rates or their outlook, it seems that was a problem as well!! To call HUD’s accounting of itself under Galante’s leadership shoddy is actually a compliment.

    The second is that not only does the President override the law when it is convenient but so do the recommendations of the Urban Institute. It seems a legally mandated 2% reserve means little to either one when there is some underlying agenda to be achieved. Reliance on the predictions of the future of the MMI Fund by HUD is hardly worth the time of day; yet it is the justification by which the Urban Institute says HUD can lower MIP rates now since HUD’s predictions show the 2% reserve will be achieved in 2016 anyway. Oh, yeah! Right!! S-u-r-e! Anything you say. 😉 😉 (or wink, wink)

string(105) "https://reversemortgagedaily.com/2015/01/07/urban-institute-tells-fha-why-mip-reduction-is-the-way-to-go/"

Share your opinion