FHA slashes mortgage insurance premium by 30 basis points
The Department of Housing and Urban Development will cut the Federal Housing Administration’s mortgage insurance premium by 30 basis points, a move that many stakeholders think is long overdue.
The cut drops premiums from 85 basis points to 55 basis points — reverting premiums to a level not seen since before the 2008 housing crisis. HUD estimates that this will on average result in yearly savings of about $800 for about 850,000 homebuyers. A 7.5% share of home sales in the third quarter of 2022 used FHA-insured mortgages.
The FHA’s Commissioner Julia Gordon confirmed the planned reduction Wednesday, noting that the cut will give homebuyers “a little room to deal with inflation” and is meant to be “meaningful” without jeopardizing the FHA’s insurance fund.
Gordon also explained that the reduction had to be modest because “despite a very high capital ratio, we know things can change quickly.”
Stakeholders in the housing industry have been calling on the administration to reduce premiums for the past two years, arguing that doing so would make the FHA’s program more affordable for homebuyers. Mortgage insurance is required for all FHA borrowers, regardless of the down payment amount.
Advocates for a cut have also noted that Mutual Mortgage Insurance Fund is flush with cash: as of Sept. 30 the capital ratio of the FHA’s MMIF was 11.11%, several times above the statutory minimum of 2.0%.
The administration was previously reluctant to commit to a change, pointing first to elevated delinquency rates and then to uncertainty about their budget for the next fiscal year. But in late December, Congress approved a final 2023 spending bill that provided HUD with $61.8 billion, or $8.1 billion more than enacted levels in 2022, making a premium cut a far more realistic proposition.
The cut goes into effect for loans endorsed for FHA insurance on or after March 20, 2023.
David Stevens, industry consultant and former FHA Commissioner for the Obama Administration noted that this reduction is perfectly “timed for the spring market especially after mortgage rates rose over the past year.”
For “an average FHA loan of $260,000 this will produce savings of approximately $65 per month for the average borrower. This couldn’t have been better timed,” he said.
Trade groups and lenders applauded the FHA’s move.
“This will especially help minority homebuyers and low-and moderate-income households who are predominantly served by FHA loans,” wrote Bob Broeksmit, CEO of the Mortgage Bankers Association.
Executive director of the Community Home Lenders of America Scott Olson, who has been lobbying for over two years for the administration to reduce premiums, noted how crucial the cut would be in today’s tough market.
“Long a top CHLA priority, an FHA premium cut is critically needed to insure minorities and other underserved borrowers have affordable access to mortgage credit, in a period of rising mortgage rates and unprecedented homeownership affordability challenges,” said Olson in a written statement
However, the announcement did not receive applause from everyone. The American Enterprise Institute, a conservative Washington D.C.-based think tank, called the move “pointless.”
Tobias Peter, AEI’s assistant director, wrote that FHA’s premium reduction and the Federal Housing Finance Agency’s risk-based pricing guidelines published late last year are attempts by housing agencies to ramp up first-time home buying, but that these initiatives are likely to fail – as they did almost a decade ago.
“The last time FHFA imposed credit loosening on the GSEs in 2014, FHA responded shortly thereafter in kind with a large 50 bps MIP cut,” Peter wrote. “At the time, FHA predicted that this cut would lead to 250,000 new first-time buyers over the next three years and save each FHA buyer $900 annually. Instead, we found that home prices rose about 2.5 ppts. faster in FHA neighborhoods and only about 17,000 new first-time buyers were brought into the market, far short of FHA’s prediction.”
Peter added that “market conditions are again not favorable to a MIP cut” and that a premium cut would get absorbed into higher prices and do little for affordability.
Instead of a premium cut, the AEI recommends for HUD to “focus on helping disadvantaged borrowers and neighborhoods reliably grow wealth” by tying any premium reduction to shorter loan terms.
Bonnie Sinnock contributed reporting to this story.
