Good afternoon,
Attached is a joint industry coalition letter that NAFCU signed on with other organizations urging the Federal Housing Administration (FHA) to reduce the costs of its single-family mortgage insurance premiums to expand access to safer and more affordable mortgages to more creditworthy households.
“In recent years, a combination of strong management, significant premium increases, and improvement in the economy has put the agency well on track to meet its capital reserve requirement by 2016, while policy changes to reduce risk layering have helped decrease risk,” the letter says. “However, considering FHA’s significant drop in volume and market share in recent years, it appears that the premium increases have kept many potential borrowers on the sidelines.” The letter notes that annual insurance premiums have increased by nearly 150 percent since 2011, and says that the number of families purchasing homes with FHA-insured mortgages is 44 percent below the historic norm.
The letter also notes the cost of the housing crisis to the agency’s capital reserve, but it says “We believe it is now time for FHA to enable more households to access homeownership by reducing mortgage insurance premiums while still maintaining fiscal prudence and continuing the trajectory toward full replenishment of the fund.”
If you would like more information on this matter or would like to speak about this with a NAFCU expert, please let me know. Thank you.
The Honorable Julian Castro
Secretary
U.S. Department of Housing and Urban Development 451 Seventh Street, S.W.
Washington, DC 20410
Dear Secretary Castro:
The undersigned organizations urge FHA to reduce the cost of its single-family mortgage insurance premiums to expand access to safer and more affordable mortgages to more creditworthy households.
As you know, FHA has twin missions to provide access to mortgage credit and to protect the integrity of the Fund. These missions are best accomplished using a dynamic evaluation of the FHA book of business, performance over time, and market fundamentals.
In recent years, a combination of strong management, significant premium increases, and improvement in the economy has put the agency well on track to meet its capital reserve requirement by 2016, while policy changes to reduce risk layering have helped decrease risk.
However, considering FHA’s significant drop in volume and market share in recent years, it appears that the premium increases have kept many potential borrowers on the sidelines. Indeed, the premium increases may be hurting the financial condition of the fund, not helping it. Since 2011, annual insurance premiums have increased by nearly 150 percent, while its upfront fees have risen by 75 percent.1 The increases in the annual insurance premium have had the most significant impact on loan affordability.
According to your agency’s latest actuarial report, the number of families purchasing homes with FHA- insured mortgages has declined in recent years and remains 44 percent below the historic norm.2 Although the recent Actuarial Review notes that FHA collected $11 billion in premiums above expected losses in FY2014, the reduced volume of FHA originations directly translates into a slower rate of recapitalization for the MMI Fund3. According to a new analysis released by the Urban Institute, it is possible for the FHA to price new business more appropriately for the risk while still continuing to build its reserves.4
A recent Mortgage Bankers Association analysis estimates that the April 2013 premium increase resulted in a 5 percentage point reduction in FHA’s share of purchase originations, which equates to a $2.9 billion decrease in MMIF economic value. 5 What’s more, now that Fannie Mae and Freddie Mac will begin purchasing loans
1 John Griffith, “As the FHA’s Finances Continue to Improve, It’s Time to Focus on Access,” Housing Horizon, November 18, 2014, available at http://blog.enterprisecommunity.com/2014/11/finances-continue-improve.
2 U.S. Department of Housing and Urban Development, “Annual Report to Congress Regarding the Financial Status of the FHA Mutual Mortgage Insurance Fund Fiscal Year 2014,” available at http://portal.hud.gov/hudportal/documents/huddoc?id=FY2014FHAAnnRep11_17_14.pdf.
3 Integrated Financial Engineering Inc., “Actuarial Review of the Federal Housing Administration Mutual Mortgage Insurance Fund Forward Loans for Fiscal Year 2014,” available at http://portal.hud.gov/hudportal/documents/huddoc?id=AR2014MMIFwdRpt.pdf.
4 Laurie Goodman, Bing Bai, and Jun Zhu, “FHA: Time to stop overcharging today's borrowers for yesterday's mistakes,” Urban Institute , Jan. 6, 2015, available at http://blog.metrotrends.org/2015/01/fha-time-stop-overcharging- todays-borrowers-yesterdays-mistakes/.
5 Mortgage Bankers Association Letter to Julian Castro, December 18, 2014, available at http://static.ow.ly/docs/MBA%20Letter%20to%20Julian%20Castro_12%2018%202014%20%282%29_2PaU.pdf.
FHA Premium Coalition Letter January 7, 2015
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with down payments of as little as three percent, FHA could find itself losing additional market share, which could put additional downward pressure on the fund. On the other hand, the GSEs’ re-entry into the very low down payment segment of the market also could cause FHA to be adversely selected, which suggests that fee reductions should leave a buffer for these types of dynamic drivers.
It is important to note that many lower-wealth borrowers and borrowers of color who historically have relied on FHA loans cannot access the conventional credit market today. In 2013, 70 percent of home purchase loans made to African Americans and 63 percent of these loans made to Hispanics were backed by government agencies rather than by the GSEs or the private market.6 Consequently high FHA premiums may be keeping many borrowers out of the market entirely, not just shifting from one credit channel to another, especially borrowers of color. According to analysis from the National Association of Realtors, 234,000 to 255,000 creditworthy borrowers were priced out of the housing market in 2014 because of high FHA premiums.
The combination of higher pricing for lower-wealth borrowers along with other constraints on credit, such as lender overlays, poses a continuing serious challenge to the mortgage market as a whole. For example, the Urban Institute estimates that the combination of these factors has locked out of the market as many as 1.2 million borrowers who would be able to access mortgages during normal market conditions.7
FHA played a crucial role in keeping the mortgage market afloat and supporting our economic recovery, preventing even more catastrophic home price declines and staving off a double-dip recession.8 That support came at a steep cost to the agency’s capital reserve, and we commend FHA for all it has done to keep mortgage credit available throughout the Great Recession while improving the financial health of the Mutual Mortgage Insurance Fund. However, we believe it is now time for FHA to enable more households to access homeownership by reducing mortgage insurance premiums while still maintaining fiscal prudence and continuing the trajectory toward full replenishment of the fund.
We look forward to FHA’s continued health and robust participation in the market as the economy continues to improve.
Sincerely,
American Escrow Association
American Land Title Association