When FHA announced it was lowering its mortgage insurance premiums in January by 50 basis points down to 0.85 percent, the move drew intense criticism from Republican lawmakers who accused the agency of cutting off a revenue stream while the Mutual Mortgage Insurance Fund capital ratio sat at 0.41 percent, less than one-quarter of the 2 percent threshold required by Congress.
On Monday, the FHA shocked nearly everyone by announcing the capital ratio of the MMI Fund had leaped from 0.41 percent in Fiscal Year 2014 to 2.07 percent in FY 2015, above the minimum threshold. Is this vindication for HUD Secretary Julián Castro, who bore the brunt of the criticism for lowering the premiums?
“Last year, it was below 2 percent, yet they were still able to reduce the mortgage insurance premiums, which is partly contributing to the good news that they announced today,” said Brian Montgomery, Collingwood Group Vice Chairman. “It’s easy to say if you’re not meeting a Congressionally mandated threshold to be continually called out on that topic, as FHA has been. Now that they’ve exceeded it, it kind of quiets those voices somewhat.”
Rep. Jeb Hensarling (R-Texas), Chairman of the House Financial Services Committee, was one of the most vocal critics of the lowering of the premiums. Hensarling grilled Castro on the topic a full Committee hearing back in February during Castro’s first testimony before Congress since becoming HUD Secretary in July 2014. Hensarling was unimpressed with Monday’s announcement that the MMI Fund had exceeded the 2 percent minimum, however.
“This is no time for hollow victory laps from administration officials,” Hensarling said. “Hardworking taxpayers remain exposed to more than $1 trillion in FHA insured mortgage credit risk, and the FHA capital reserve remains woefully insufficient.”
The MMI Fund’s economic value is now $24 billion, an increase from almost $41 billion since hitting a low of minus $16.3 billion in 2012. FHA estimates that the lowering of the premiums stimulated an increase of 42 percent in total volume, including a leap of 27 percent in purchase-loan endorsements. The reduction in MIP in January down to 0.85 percent also allowed FHA to serve about 75,000 borrowers with credit scores of 680 or lower.
The full impact of lowering the mortgage insurance premiums has yet to be determined, however.
“They did it about halfway through the fiscal year, so it’s hard to see what the full read of that is going to be,” Montgomery said. “But they did prove themselves correct in that it wouldn’t make matters worse. There were some that were worried that the FHA needed more revenue, but at what price? Some were thinking they had maybe lowered the premiums too much. But if you look at the number of loans that increased from last year, and particularly the purchase loans, you can see that it had its intended effect of driving up the volume.”
Will FHA lower the premiums more now that moving them down to the 0.85 percent level seems to have contributed to increases in loan volume and in the MMI fund itself? Montgomery, one of the country’s foremost housing policy experts who served as FHA Commissioner and Assistant HUD Secretary during both the Bush and Obama Administrations, doesn’t think so.
“If you asked me if I think the FHA will lower the premiums again, I doubt it,” Montgomery said. “I doubt they would do it anytime soon. One, I think they want to wait at least a full year to see what the impact of last year’s premium decrease was, and two, it happens to coincide with finalizing of the FY2017 president’s budget, which will be rolled out early next year. Obviously, FHA premiums generate a lot of revenue that’s used to offset HUD’s budget. That’s a long way of saying the Office of Management and Budget has a pretty big seat at that table and they talk about the serious topic of FHA mortgage insurance premiums.”