The Federal Housing Administration (FHA) insurance fund hasn’t been this healthy since the eve of the Great Recession. Late last year, the U.S. Department of Housing and Urban Development (HUD) published its fiscal year 2019 report that included the fund’s minimum capital ratio — a metric that predicts the fund’s ability to pay claims on FHA loans that have defaulted. The ratio at that time was 4.84%, which was nearly two-and-a-half times above the minimum level required by Congress. It also was the highest ratio recorded since fiscal year 2007.
Since 2013, the fund’s overall health has improved along with the U.S. economy and lenders have seen fewer troubled FHA mortgages. As the insurance fund has moved further into the black, housing advocates and some mortgage trade groups have argued that the typical FHA borrower — who is often some combination of a first-time buyer, low- to medium-income wage earner or a minority — is being overcharged for mortgage insurance. A number of special interest groups want HUD to reduce premiums to pre-recession levels and end a 2013 requirement that most FHA borrowers must pay annual mortgage premiums for the life of their loan.
FHA is basically overcharging borrowers.
Changes that would make FHA loans more affordable and competitive may not happen soon, however. One of the first acts of the Trump administration was to veto a drop in FHA premiums that was announced in the waning days of the Obama administration. The annual premium remains at 0.85% of the loan amount, which is 35 basis points higher compared to where it was from 2001 through mid-2008, according to Moody’s Analytics.
The housing-finance reform plan released last year by the Trump administration indicated that the favored course was to shrink the FHA footprint. That said, the strengthening condition of the insurance fund has made it harder to argue that the existing FHA premium structure is necessary to keep the fund healthy.
“FHA is basically overcharging borrowers,” says Scott Olson, executive director of the Community Home Lenders Association (CHLA). Olson believes that the life-of-the-loan requirement is particularly unfair. Within a few years of an FHA loan origination, the agency is losing its strongest-performing borrowers, who refinance into conventional loans.
There are arguments against lowering the costs of FHA insurance at this time, however. One is that the FHA’s reverse mortgage program — the Home Equity Conversion Mortgage, or HECM — continues to be a drag on the fund. This is occurring despite several changes made by the Obama and Trump administrations to limit the risk of reverse mortgages.
At the end of fiscal year 2019, for example, the agency’s reverse mortgage portfolio had a negative capital ratio of 9.22%. In essence, this is causing FHA to charge its forward mortgage borrowers more for insurance than the risk justifies, in order to make up for the losses and volatility in the reverse program.
Pete Mills, senior vice president of residential policy and member engagement with the Mortgage Bankers Association (MBA), says he would be more comfortable with lower costs for FHA forward mortgages if the agency’s forward and reverse loan programs had separate insurance funds. Changing the current structure is a heavy lift, however. Congress would have to pass legislation to create separate insurance funds for each program.
Mills also notes that even though the overall FHA mortgage fund is in better shape, HUD’s modeling suggests that it would not be able to weather a major downturn without a bailout.
“If you read where FHA is coming from, they want to see if the fund can survive a 2007- or 2008-type downturn,” Mills says. “They estimated that it’s short of having that level of claims-paying capacity.”
HUD officials have noted a rise in risk layering for FHA forward mortgages. The MBA has urged HUD to take a cautious approach to adjusting the premiums until it solves some of these issues.
Lindsey Johnson, president of U.S. Mortgage Insurers, says the FHA insurance fund’s current fiscal health is highly vulnerable to market changes. Home prices have escalated dramatically in recent years, which has bolstered the fund. HUD officials also have noted that a small decrease in home prices could significantly reduce the fund’s capital-ratio level.
“Taxpayers are currently exposed to over $1.19 trillion in outstanding mortgage risk at the FHA,” Johnson says. “This would only increase if FHA insurance premiums were reduced. Also, any change to FHA’s life-of-loan coverage would mean exposing taxpayers to further undo risk.”
Ryan Kelley, founder of The Home Loan Expert LLC, disagrees. The St. Louis-based originator, who works nearly every day with FHA forward mortgage borrowers, says he sees no reason why the typical FHA borrower needs to pay annual insurance premiums for up to 30 years once they have proven themselves.
“They’re overcharging the borrowers,” Kelley says. “When you [include a] life-of-the-loan [insurance-premium provision], you never give them a chance to get rid of it. You’re just testing them all the way to the end. It just doesn’t seem like what that program was originally designed for.”
