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August 28, 2016

Urban Institute to FHA: Stop Overcharging

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Urban Institute to FHA: Stop Overcharging

In a recent blog post, Urban Institute officials argue that the Federal Housing Administration’s high home mortgage insurance premiums are unnecessarily sidelining potential home buyers and forcing new buyers to pay for past buyers’ mistakes.

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Since 2010, the FHA has raised its annual premium 145 percent, which means a borrower with a $200,000 loan must be able to pay $1,600 more per year in fees. As the FHA has raised its insurance premiums and credit score requirements of borrowers, the agency has seen a significant drop in its volume of loans due to the higher costs. The National Association of REALTORS® has estimated that nearly 400,000 creditworthy borrowers were priced out of the housing market in 2013 because of high FHA insurance premiums.

The FHA has increased its fees to make up for a big loss of reserves in its Mutual Mortgage Insurance Fund, which is required to keep a 2 percent capital reserve ratio and which was depleted in the wake of the housing crisis by a high number of defaulted loans. But in recent months, the FHA has gotten back in the black, which has led an increasing number of associations, trade groups, and members of Congress to call for the FHA to lower what it’s charging borrowers.

“Today’s high premiums penalize current borrowers for the pricing and performance of the earlier vintages and the deficit in the reverse mortgage program – the two main causes of the fund’s continuing inability to meet its 2 percent congressionally mandated reserve ratio,” Urban Institute officials write in a recent blog post.

The FHA mortgage program has been a major source of financing for the single-family housing market, particularly minority, low-income, and first-time home buyers.

In an analysis, the Urban Institute analysis shows that the FHA’s fund failed to meet its cash reserve requirement because of poor performance of loans made before and during the financial crisis as well as a shortfall in revenues driven in part by today’s higher premiums. Urban Institute analyzed the FHA’s performance in looking at mortgages that defaulted over the past few years and took into account projected losses the agency would face during normal economic times and stressed periods.

“If the FHA’s ultimate goal is to break even with each vintage, there is a room for a significant premium cut,” Urban Institute researchers note from its analysis. “Even if [the agency] succeeds in taking on a much broader book, with a greater number of higher risk borrowers and expected losses, the FHA could cut annual premiums in half, from 1.35 percent to 0.65 percent, and still break even.”

The FHA's MMI fund is still well below its federally mandated reserve ratio. But Urban Institute researchers ask: Should the FHA continue to overcharge new borrowers to make up for undercharging older ones?

“Maintaining higher premiums leads many of the FHA’s better credit borrowers into alternative channels, leading to less revenue and a more costly credit mix,” Urban Institute officials note in the blog post based on their analysis.

Instead, they argue, it would make more sense for the FHA to make up the shortfall in reserve funds more gradually and price new business more appropriately for the risk.

“Rather than attempting to make $5.7–$6.8 billion with its 2015 book of business (depending on how quickly the desired mix is achieved), it would serve the FHA better to lower the premiums and achieve the reserve at a more gradual pace,” Urban Institute officials note. “If the FHA lowered the annual premium on the 2015 book to 0.9 percent, it would make $2.0–$3.1 billion, depending on the loan mix. While that may not be the right number, we believe the wisest course of action is some reduction in the insurance premium, with the exact amount depending on the FHA’s own internal estimates and policy preferences.”

Source: “FHA: Time to Stop Overcharging Today’s Borrowers for Yesterday’s Mistakes,” Urban Institute Metro Trends Blog (Jan. 6, 2015)