Opinion: FHA Premium Reduction Risks

There has been a flurry of recent articles predicting a decline to Federal Housing Administration (FHA) Premium.several industry associations including Mortgage Bankers Association corresponded to HUD Secretary in favor of cutbacks. A news story suggested the president could announce cuts to FHA premiums before the November election.

A similar publication Created by former HUD secretary Andrew Cuomo a week before the 2000 presidential election, the FHA lowered its upfront premium and introduced a “lifetime loan” premium when borrowers reached 22% equity in a home. I pulled it down.

It is doubtful whether the FHA’s premium cuts are more on the minds of voters today than they were in 2000, but the administration frequently weighs what it sees as positive news about the election cycle.

Naturally, the administration is looking to reduce the costs that are burdening so many low- to middle-income families with FHA loans during this time of high inflation and high interest rates. Some see the FHA’s capital level as capable of meeting the across-the-board reductions currently charged to most borrowers to his 1.75% upfront or his 0.85% annual premium, perhaps both. . But in the current environment, there are reasons to be cautious.

Before reducing the FHA’s expected revenues and thereby lowering its ability to pay claims, the FHA, while not garnering much headline, continues to be a lasting phenomenon that is the lingering economic impact of the pandemic. must be dealt with. About 345,000 homeowners are continuing her COVID reprieve plan with their mortgage servicer. Of those borrowers, at least 137,000 have taken out his FHA-insured loans.

Another 225,000 FHA borrowers are severely delinquent and have not sought reprieve or loss mitigation assistance. Also, his 156,000 borrowers who have finished their grace period are delinquent again.

These numbers are modest by FHA standards and are well down from the pandemic highs. Nevertheless, we are in an era of economic uncertainty: rising inflation, degree of interest A nationwide recession is looming, according to many experts. The homebuying and refinancing market has slowed significantly, with home prices falling in nearly all major metropolitan areas, but many areas are still above pre-COVID levels.

If the going gets tougher, FHA borrowers who are still tolerant, or those who have been unable to complete their COVID loan modifications or are back in arrears will need additional support. Over the past year, he’s seen an increase in early payment defaults on the FHA, so it’s possible that the more recent borrowers do as well.

Moreover, once one of the key tools, interest rate cuts, is virtually eliminated in this interest rate environment, leaving the FHA to incur higher costs due to workouts and defaults, FHA servicers’ loan modification options become more limited. .

We have offered to temporarily buy out or subsidize interest on loan modifications using Homeowners Assistance Fund (HAF) or FHA partial claims. on behalf of their citizens.

The FHA’s Mutual Mortgage Insurance Fund (MMI Fund) is a major buffer against these inevitable changes in housing and the economy. This is the counter-cyclical role the FHA would play if lending in the private market were restricted or, more recently, if the global pandemic hit the economy negatively, leading to unexpected job losses and income declines. is the basis for

To achieve its objective of boosting mortgage defaults, the MMI Fund’s sensitivity to macroeconomic outcomes and embedded in predictive models that have been proven to change dramatically, such as high house prices (HPA). It is important to understand the assumptions made.

As the FHA emphasizes, 2021 Annual Report to Congress, the MMI capital ratio proves to be about three times more sensitive to HPA declines than to interest rate declines. The MMI fund’s calculations show that a meager 1% drop in HPA lowers the capital adequacy ratio he by 1.26 percentage points.

Understanding the correlation between HPA changes and reported MMI fund portfolio valuations is key to understanding how quickly the financial performance of MMI portfolios can change.

core logic estimates that the year-over-year HPA will fall from 20% reached in February to 3% in 2023. By 2009, highlighted in the FHA’s FY2021 Annual Report, when the HPA fell from about 32% in 2007 to 15% in 2009.

In 2007, the MMI Fund’s capital adequacy ratio was 7.4%. By 2008 the capital ratio he had fallen to 3.2% and by 2009 to .4%. By 2012, the FHA’s capital adequacy ratio had fallen to -1.4%, and in 2013 he had to withdraw $1.7 billion from the U.S. Treasury Department.

The FHA will publish the results of the 2022 Mutual Mortgage Insurance Fund Annual Review shortly after the premium decision passes the election. For clarity, in our annual review looking back at 2022, we expect capital adequacy to improve and surpass the 8%+ ratio achieved in 2021.

In fact, given that a recent quarterly report to Congress showed a positive economic value of $138 billion for MMI funds, the pressure will only increase toward lower premiums. But the next report is a rear-view mirror, reflecting more optimistic economic assumptions than current forecasts.

Economic assumptions are hypothetical only and subject to change.

We are not looking for ruin or darkness. The FHA also fulfills its mandate as a stabilizing force for home ownership in the United States, ensuring that low- and middle-income families and individuals live in their homes in the most efficient and sustainable way possible, and that America’s way of life is made possible. , hopes to help them fully participate in particularly difficult economic times. environment.

But before we consider lower premiums a serious option, we need to answer a few questions. Can the Mortgage Insurance Fund Support a Potential Recession and Falling Home Prices in 2023?The Needs of His Future FHA Borrowers Outweigh the Needs of Homeowners Struggling With FHA Loans Today is it?

And if the administration is planning this cut, why wasn’t it included in the president’s proposed 2023 budget? Without it, how will it pay for it?

We want the FHA to carefully prioritize the most needy borrowers, ensure extra resources first, maintain home equity, and ensure that those at risk of losing their homes meet their fate. I believe it is necessary to prevent suffering.

Brian Montgomery is a founding partner of Gate House Strategies, served as Deputy Secretary of the U.S. Department of Housing and Urban Development from 2019-2020, and served as FHA Commissioner in the George W. Bush, Obama, and Trump administrations.

Keith Becker served as Deputy Assistant Secretary for Risk Management and Regulatory Affairs at the U.S. Department of Housing and Urban Development and Chief Risk Officer for the FHA. Previously, Freddie worked for Mack for nearly 26 years, most recently as chief credit officer for single-family homes.

This column does not necessarily reflect the opinions of the Editorial Board of HousingWire and its owners.

To contact the author of this article:
Brian Montgomery [email protected]
Keith Becker [email protected]

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

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