Housing and Urban Development Secretary Julian Castro moved swiftly on Thursday to defend pending cuts to the Federal Housing Administration’s premiums, rebutting GOP arguments they are premature.
Republicans blasted the administration’s decision to cut the annual mortgage insurance premium in the hopes of boosting spring home sales and accelerating the housing recovery, noting the FHA’s fund is well short of its statutory minimum.
But Castro told reporters that the premium reduction will delay reaching the 2% minimum by just a few months, and said lower premiums were needed urgently to help struggling borrowers who are having trouble obtaining credit.
“We are in a position now where we can strike a very good balance between ensuring that we have a strong fund and we can offer greater opportunity for hard working families to own a home,” Castro said on a conference call. “So now is the right time…to offer this premium reduction.”
President Obama formally announced the change Thursday during a speech in Phoenix, confirming that the FHA’s annual premium will fall 50 basis points to 85 basis points. He argued it would make FHA-insured loans more affordable and may spark refinancings for existing borrowers to take advantage of low rates.
The president noted the premium reduction will save FHA borrowers $900 a year on a $200,000 mortgage.
“That $900 could be a full month’s payment that they’re saving,” Obama said. “Over the next three years these lower premiums will give hundreds of thousands of more families a chance to own their own home. And it will help make owning a home more affordable for millions more households overall in the coming years.”
The president also stressed that it will accelerate growth in the housing market and “stabilize prices in areas like Phoenix that have a long way to come back.”
But he also emphasized that this would not return to the days of giving mortgages to those who couldn’t afford them.
“Don’t buy something you can’t afford,” Obama said. “You’re going to be out of luck. These rates are for responsible buyers. We’re not going down the road again of financing folks buying things they can’t afford. We’re going to be cracking down on that.”
One of the big motivators behind the fee reduction is fear that the FHA will lose market share to Fannie Mae and Freddie Mac, which are poised to offer new low downpayment products.
Seasoned FHA borrowers with significant price appreciation have been refinancing into Fannie and Freddie loans, which have lower costs than FHA-insured loans. But the premium reduction makes it more advantageous to refinance into a new FHA loan.
Borrowers that took out a 4.5% FHA loan last year will be able to refinance into a 3.5% loan this year due to lower interest rates and the 50-basis point reduction in annual premium, according to mortgage consultant Brian Chappelle.
The premium reduction also “expands the credit box” because the lower premiums will allow more borrowers to qualify for FHA-insured loans, Chappelle said.
Over the past few years, FHA has raised its annual premiums from 55 basis points to 135 basis points in an effort to recapitalize the agency’s mortgage insurance fund. The capital ratio turned positive in fiscal year 2014 and stood at 0.41% as of Sept. 30, but is still below its 2% statutory minimum.
FHA officials are aiming to implement the premium reduction before the end of this month. The current 175-basis-point upfront premium will remain in effect and borrowers will have to pay the 85-basis point annual premium over the life of the loan.
Republican lawmakers said the decision was a mistake and argued that the FHA’s move combined with the low-down-payment products from Fannie and Freddie risk sparking another housing crash. The Federal Housing Finance Agency is also considering reductions in the guarantee fees the two government-sponsored enterprises charge lenders.
“The president’s decision reflects a race to the bottom between the FHA and the GSEs in which the private sector is crowded out and taxpayers are left holding the bag,” said Rep. Ed Royce, R-Calif., in a statement. “The financial crisis is proof positive that an increased government presence in housing distorts the market and promotes the very boom-and-bust cycle we are trying to avoid.”
House Financial Services Committee Chairman Jeb Hensarling, R-Texas, dismissed claims that the FHA fund is on the mend.
“The Financial Services Committee is already planning to bring Secretary Castro before our members to question him about the poor financial condition of FHA,” Hensarling said. “The American people want an end to the destructive cycle of boom, bust and bailout that poor decisions in Washington produce.”
Republican Sens. Bob Corker of Tennessee and David Vitter of Louisiana have also raised objections to FHA decision, claiming it will lead to the underpricing of government-guaranteed loans.
“The lowering of the insurance premium on FHA loans will make FHA loans more competitive relative to the Fannie and Freddie guaranteed loans. Instead of better protecting taxpayers from incurring losses…during a future economic downturn, the government is involved in a race to the bottom by reducing taxpayer protections to expand government credit guarantees,” the two banking committee members said in a statement Thursday.
FHFA Director Mel Watt is considering adjustments to the guarantee-fees and loan level price adjustments that Fannie and Freddie charge.
“We believe that the FHA pricing reduction provides additional political cover for FHFA Director Watt to flatten the LLPA grid when the G-fee decision is released later this year,” according to Compass Point Research & Trading LLC analyst Isaac Boltansky.
After years of fee hikes and tight credit, it appears FHA and FHFA are both aiming to boost mortgage credit availability.
HUD estimates the FHA premium reduction will benefit 800,000 borrowers annually including 100,000 to 200,000 refinancings.
But lenders are telling Chappelle they are expecting much higher refinancing volumes.
“With low mortgage rates and the 50-basis-point premium reduction, this is going to generate a refinancing boom,” said Chappelle, co-founder of Potomac Partners in Washington.
In fiscal year 2014, FHA endorsed nearly 373,000 forward single-family loans, including 100,000 refinancings.
The Mortgage Bankers Association and others in the housing industry welcomed the FHA price reduction.
“This is a win-win. It’s good for borrowers and good for FHA, helping the agency stabilize its market share and continue to rebuild the MMI fund,” said David Stevens, president and chief executive of the group, who is a former FHA commissioner.
The premium reduction could be a boom for lenders that specialize in FHA financing. Around 70% of FHA loans are made by independent mortgage banking firms.
But a lot of banks don’t originate FHA loans because of all the rules and potential liability. Several large banks exited the FHA space after they got caught cutting corners and entered into hefty settlements with the Justice Department and HUD.
The average FHA credit score is around 680 and banks consider them high risk loans in terms of defaults and foreclosures, which can lead to indemnifications or buybacks.
“The industry is not ready to take on a lot of credit risk,” said Ron Haynie, senior vice president at the Independent Community Bankers of America. “I just don’t think you will see a stampede of lenders moving into the FHA space.”
Robert Davis, executive vice president of the American Bankers Association, said that banks have a “bias” toward doing Fannie and Freddie lending.
FHA has made efforts to address the bank’s concerns about credit and putback risk, he said in an interview.
“But reports are there is going to have to be a track record before there is great comfort with the change of regime” at FHA, Davis said.
Meanwhile, analysts expect the reduction in FHA premiums will provide a boost for the traditional spring home buying season.
“This should be viewed positively for homebuilding volumes heading into the 2015 spring selling season, particularly for builders with exposure to the first-time buyer segment,” Boltansky said.