The Community Home Lenders Association (CHLA) is calling for the Federal Housing Administration (FHA) to reduce its annual premiums, pending the outcome of the federal agency’s Actuarial Report next month.
In a letter this week written to Edward Golding, principal deputy assistant secretary for the Office of Housing at the Department of Housing and Urban Development, the CHLA urged that the FHA cut its annual premiums back down to the pre-crisis level of 0.55% once its Mutual Mortgage Insurance (MMI) Fund reaches its capital reserve requirement of 2%.
The organization also called for FHA 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,” stated the CHLA in its letter dated October 28. “Upfront premiums were modestly increased, and annual premiums skyrocketed, going from 0.55% 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.”
The MMI Fund is responsible for two “operational goals,” as listed within the National Housing Act. The first being “to minimize the default risk to the Fund,” and the second being “to meet the housing needs of the borrowers” that the program is “designed to serve.”
FHA addressed this latter goal in January of this year, when the agency reduced annual premiums from 1.35% to 0.85%. The action helped expand access to credit for more qualified families who were then able to buy a home, as well as for existing homeowners who enjoyed “substantial savings” through refinances, CHLA stated.
As a result, FHA purchase volume during the first six month of 2015 was 24% higher compared to the same period in 2014, noted CHLA, and total volume was up 50%. Through June 30, FHA had endorsed 735,000 loans, which CHLA notes is almost as many as in all of Fiscal Year 2014.
“This improved access to mortgage credit aligned with FHA’s mission,” stated CHLA in its letter to HUD’s Golding. “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.”
In November, FHA will release its annual Actuarial Report, which reveals the financial condition of the MMI Fund, including the performance of FHA’s Home Equity Conversion Mortgage (HECM) program.
“If the Actuarial Report exceeds a 2% Net Worth, CHLA believes FHA should cut annual premiums back down to the pre-crisis level of 0.55%,” stated CHLA.
However, if the 2% level is not reached next month, CHLA believes that FHA should use an interim method of tracking net worth, such as quarterly or semi-annual evaluations, and should cut annual premiums to 0.55% once the MMI Fund reaches the 2% capital reserve ratio.
Last year’s report revealed the Fund’s overall net worth improved by $6.1 billion in FY 2014, increasing from negative $1.3 billion to positive $4.8 billion, with a then current capital ratio of 0.41%. However, the HECM portfolio showed a deterioration in its economic value, falling from posit $6.5 billion to negative $1.2 billion during the fiscal year.
View the CHLA letter.
Written by Jason Oliva