The Federal Housing Administration (FHA)'s lowering of the annual mortgage insurance premium by 50 basis points in January was intended to expand access to credit and make it easier for minority borrowers and first-time homebuyers to enter the market.
The move was widely praised by the Obama Administration as a path to homeownership but at the same time it was highly controversial because it was made only two months after HUD reported to Congress in November 2014 that the FHA's Mutual Mortgage Insurance Fund's capital ratio was at 0.41 percent (less than one-fourth of the 2 percent required by law).
Half a year after the FHA's lowering of the mortgage insurance premiums, is this move a step toward achieving the goal of enticing more minorities and first-time buyers into the housing market or has it simply increased the government's role in housing finance?
Recent research by Washington, D.C.-based think tank American Action Forum (AAF) showed that as of the end of May, the share of FHA endorsements for both minority borrowers and first-time homebuyers was unchanged from a year earlier–33 percent for minority borrowers and 83 percent for first-time buyers. In fact, in its most recent quarterly report to Congress, FHA revised its subsidy rate downward from -9 percent to -5 percent, according to Andy Winkler, Director of Housing Finance Policy at AAF.
"A negative subsidy rate indicates that the government stands to make a paper profit from the loan guarantees under current federal credit accounting rules," Winkler said. "Yet FHA has a long history of overestimating the value of its Mutual Mortgage Insurance Fund and this time appears no different."
Another of the effects of the lowering of FHA's mortgage premiums is that the distribution of FHA endorsements is shifting toward higher credit score borrowers and toward more expensive loans. According to AAF, the share of new FHA endorsements with credit scores higher than 680 increased from 41 percent in Q4 2014 up to 45 percent in Q1 2015, after the premiums were lowered. The FHFA's competitive pricing for this group of borrowers is pushing private companies out of the mix, according to Winkler.
From Q4 2014 to Q2 2015, the share of FHA loans with balances of less than $150,000 dropped from 48 percent to 43 percent, indicating that the distribution of new FHA endorsements is shifting toward higher loan amounts. According to Winkler, the loans with higher balances "add further risk to FHA’s still-recovering balance sheet and likely do not help those 'locked out' of home buying."
In January when the premium reduction was announced, Auction.com EVP and housing expert Rick Sharga said a likely effect of lowering the premium would be a slight increase in FHA's share of loan volume, "as their offerings will now be competitive versus conventional loans, especially for sub-729 FICO score borrowers." AAF cited a report from Inside Mortgage Finance which found that FHA originations increased by 5.5 percent from Q4 2014 to Q1 2015, which gave them a 32 percent share of the market. AAF's research indicates the government's role in mortgage finance is increasing despite National Economic Council housing policy adviser and former counselor to the Secretary of Treasury for Housing Finance Policy Michael Stegman's declaration last year that "There is no sound policy reason for the government to support the overwhelming majority of mortgage credit extended in this country when there is sufficient private capital able to responsibly bear this risk."
AAF also noted that prepayments, which include full payoffs and FHA refinances, have spiked by 163 percent year-over-year for the five-month period from January 1 t0 May 31, 2015 (from $40,000 up to nearly $88,000).