The Risk Behind Lowering FHA Premiums

The Obama administration recently announced significant cuts in the premiums the Federal Housing Administration (FHA) charges mortgage borrowers, but such reductions could put the FHA at risk, writes The Washington Post in a recent article.

Following the FHA”s $1.7 billion federal bailout in September 2013, the agency implemented a more cautious lending policy meant to help the agency rebuild its capital. 

“Housing lobbies howled about the damage a more cautious policy would do to home sales and mortgage originations — which is to say, their profits,” The Washington Post writes, noting that as of Nov. 18, the FHA’s acting director, Biniam Gebre, said the agency’s capital ratio had rebounded to 0.41%. “Mr. Gebre noted, accurately, that a key factor in the FHA’s return to a semblance of solvency was its having significantly increased the premiums it charged borrowers.”

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The premium reduction — which could save the typical homebuyer $900 per year — is slated to go into effect Jan. 26, and that might be too soon for an agency that is still regaining its footing.

“The administration can still reconsider, which is what it will do if it has really learned a key lesson of the Great Recession: Finance in general, and mortgage finance in particular, is riskier than it sometimes seems, and the best protection against those risks is a solid core of capital,” The Washington Post writes.

Read the article here.

Written by Cassandra Dowell

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  • Cassandra does a great job summarizing the article but the issue is very real. The Acting FHA Commissioner is standing on the right principle but the President seems set on taking risk in order to gain favor with FHA forward mortgagees, new borrowers, and Realtors. Does the HUD Secretary actually support this move if POTUS was not putting on full court pressure? It is a smart political move by POTUS even if it is a risky financial one. But in this case should politics trump financial risk?

    Why not allow the MMI Fund return to a more solid financial position before reducing the revenue the MMI Fund needs to recovery to financial stability?

    It is the other MMI Fund programs which have provided cover to the HECM portion of the MMI Fund. Over $5.9 in total net transfers have been taken out of those programs to bolster the HECM portion of that fund. The President’s proposal could expose the HECM program once again to undue scrutiny in the House and now the Senate.

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