African Reserves Loans

Opinion: FHA should lower mortgage insurance premium


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With the presentation to Congress of the FHA actuarial study it’s time to make that call: ATH Secretary Marcia Fudge and President Joe Biden must lower the FHA Premium. Failure to do so results in overcharging first-time homebuyers and especially African American and Hispanic borrowers, the segments of our housing population in need of the most support.

I say this as a former commissioner of the FHA and as a person who, during a time when the fund was really stressed, went to Congress to ask for additional authority to increase premiums. And once that was legislated, I raised them. This time it’s different. This time around, we need a universal appeal to this administration, which is made up of Democrats who often talk about wanting to help minorities and first-time buyers.

The call is as follows: Lower the FHA MIP now.

Here are the reasons why:

  1. What is the actuarial report, why is it important and what does it say? The actuarial study is performed as a requirement for Congress and submitted annually in November. Written by an independent third-party audit firm, the study produces a net present value of the total of the FHA’s term and reverse mortgage portfolios. Simply put, it looks at all loans insured in the single-family business and takes into account the expected interest rates, house price forecasts, default rates and severity rates over the life of those loans, some of which will be counted for 30 years. During the Great Recession of 2008, the forecast actually turned negative, resulting in a mandatory withdrawal from the treasury to meet the minimum capital reserve ratio requirement of 2%.
  2. What is the capital reserve rate? Congress mandated, based on a previous period where the MMI (Mutual Mortgage Insurance) fund was highlighted, that the FHA at all times maintain sufficient resources to handle any expected losses, as well as an additional buffer of 2% to manage future uncertainties not foreseen by the actuary. business study. In other words, the capital reserve ratio of 8.03% is excess capital beyond the Congress requirement of the minimum of 2%. This part is important because based on this recent report, the FHA has the resources (money) to cover any losses in the future.

This week’s statement alluded to concerns over serious delinquent loans and a desire to realize the outcome of the pandemic and its impact on the fund before considering changes to premium levels. But the actuary has already done it. It took into account all loans from their current status. So any delay essentially comes down to questioning the actuary himself.

I’m not saying forecasting isn’t hard and actuarial reports aren’t often wrong, but the size of the current surplus is huge.

In fact, it’s bigger than ever for the FHA as a program. In other words, there is more than enough “buffer” to deal with the obstacles in the road as a result of the pandemic and the forbearance process.

The actuarial profession itself is clear. The FHA has over $ 100 billion in capital, the biggest cushion of all time, producing a capital reserve ratio of 8.03%. While some FHA observers compare this reserve to banking standards and may argue that it is too low in comparison, keep in mind that this reserve is based on an analysis of the full NPV of the books on the market. term of the loan. This is a much more aggressive standard than most private market capital cushions respectively.

The reserve trend has also steadily increased over the past decade.

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While the MMI fund suffered massive stress during the Great Recession, mainly due to a roughly 20% drop in house prices nationwide, the fund has grown exponentially, increasing its reserves further. $ 20 billion since last year alone and nearly $ 58 billion in the past two years.

But there are risks.

The report is concerned about the outcome of the pandemic and the impact it could have on the fund. But two things are clear. First, the severity risk is totally different from that of the Great Recession, as house prices have risen significantly from declines since the 2008 recession.

This equity cushion is essential to create the safety net necessary to keep the fund healthy. In fact, since 2013, as noted in the FHA report to Congress, the value of an average home in America has increased by 79.09%. This is a huge stock cushion that would soften the blow of almost any economic trend in any simulation.

Second, we saw the impact of the new stunt modification efforts implemented at the FHA and their effectiveness. In fact, the FHA forbearance numbers clearly show the effect, in a good way, with the majority of homeowners already out of forbearance.

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So why is this important? Because failing to cut premiums now means first-time home buyers and minority buyers will face an excessive and unnecessary home ownership tax. Just look at HUD’s own data on FHA loans:

1. 84.61% of FHA loans are granted to first-time buyers. Compare that to the larger GSE market which only hits a 45% FTHB rate and it’s clear that FHA is the leading homeownership program and is reaching out to younger people at a time when every penny counts – well more than those in higher income brackets. .

2. FHA is the premier resource for African American and Hispanic borrowers. 17% of all loans made by the FHA were to black borrowers and 25% to Hispanic borrowers. Compare this to the much larger private GSE market, Virginia and more where their role is respectively 6% and 10%. The FHA is the primary source of funding for younger and more diverse borrowers buying their first home and in proportion to the much larger volumes of GSEs combined, this only exacerbates their unique role in this critical space which the President and secretary Fudge therefore often speak. In other words, as John Kennedy asked, “if not us, who? if not now when? ”

There is so much more here calling on the FHA to take action and now. But let me summarize the points here.

  1. The FHA plays a vital role in supporting minorities and first-time buyers.
  2. Keeping premiums high, as they are now relative to risk, is simply a cost shift off the backs of those who need those savings the most. In fact, some might argue that they hold high premiums because these huge reserves are treated as homeowners’ profits and can be used to fund other government programs. It would be horrible to think that policymakers would back a regressive tax on the backs of the neediest homebuyers to push profits toward other congressional and administrative budgetary needs.
  3. The independent actuarial study takes into account all expected losses for the entire FHA book. Withhold premium cuts when the FHA prints huge profits (called negative subsidy in budget parlance). There is no reason to delay a move here. Each borrower who takes out a mortgage every day pays an additional fee for a government program designed to build reserves based on safety and soundness, but not to be a profit center for other federal programs.

Look, I’ve heard all the arguments against cutting premiums. They range from investor confidence in GNMA to past history. When I was Commissioner, and in the years that followed, I led the fight against premium cuts because I had deeper concerns about building a cushion so that the FHA program was never threatened. in the future. But we are well beyond this stage. Keeping the premium this high while the fund is growing at such a rapid rate is hurting the borrowers this administration spends so much time talking about.

It is now. Lower the FHA MIP.

David Stevens is the former FHA Commissioner and has held various positions in real estate finance, including as Senior Vice President of Single Parent Families at Freddie Mac, Executive Vice President at Wells Fargo Home Mortgage, Assistant Secretary of Housing and CEO of the Mortgage Bankers Association.

This column does not necessarily reflect the opinion of the editorial staff of HousingWire and its owners.

To contact the author of this story:
Dave Stevens at [email protected]

To contact the editor responsible for this story:
Sarah Wheeler at [email protected]

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