FHA Fund Improves, But Lower Premiums Still Unlikely

WASHINGTON — The Federal Housing Administration's mortgage insurance fund is finally in the black, but not strong enough that the agency is likely to lower premiums anytime soon.

The agency's actuarial report released this week said the FHA's Mortgage Insurance Fund reached a 0.41% capital ratio in fiscal year 2014, which ended Sept. 30, up from a negative 0.11% in the year prior. While the improvement was good news, the fund's ratio was well below its statutory minimum of 2%. The agency predicted that would change within two years, but House Republicans are skeptical.

"We've heard similar rosy predictions about FHA finances for years," House Financial Services Committee Chairman Jeb Hensarling said in a statement released Monday afternoon. "Some in Washington are now clamoring for the FHA to lower its annual mortgage insurance premiums. But until the FHA fulfills its statutory requirement, that should be a nonstarter."

Even with that warning, some industry groups are calling for the FHA to lower its 135-basis-point annual premium, which can cost homebuyers $200 to $400 a month depending on the size of the loan. The agency raised the annual premium from 55 basis points three years ago to help recapitalize the fund.

The National Association of Realtors estimates that in 2013, nearly 400,000 potential borrowers were priced out of the housing market because of high FHA insurance premiums.

Now that the FHA fund is "on the path to recovery, NAR urges FHA to lower its annual mortgage insurance premiums and eliminate the requirement that mortgage insurance be held for the life of the loan," Chris Polychron, the Realtor group's president, said in a statement.

But Department of Housing and Urban Development officials are caught in a tricky situation. They realize FHA can't serve lower-income homebuyers without reducing or restructuring premiums, which are the highest in the FHA's 80-year history.

But they don't want to anger Republicans like Hensarling or Sen. Richard Shelby, R-Ala., who is slated to become the Senate Banking Committee chairman in January.

Hensarling and Shelby would likely "publicly and aggressively attack a move to lower the FHA premiums in advance of the Mutual Mortgage Insurance Fund clearing 2%," Isaac Boltansky, an analyst at Compass Point, wrote in a note to clients.

Shelby is also a senior member of the Senate Appropriations Committee, which has jurisdiction over HUD's budget.

Keeping FHA premiums at current levels is "a positive for private mortgage insurers and an incremental negative for mortgage originators and lower-priced homebuilders," Boltansky said.

"At this point, the likelihood of an FHA premium reduction is dependent on whether advocates and [Obama] administration officials can effectively portray the tight state of mortgage credit and successfully articulate a need for FHA to more actively increase the flow of credit to lower credit borrowers," Boltansky said.

In releasing the FHA actuarial report, HUD Secretary Julian Castro told reporters that the fundamentals of the FHA fund are on a "strong track." Over the past two years, the value of the fund has increased by $21 billion, he said, while the capital ratio has increased from a negative 1.44%.

"As the housing market continues to get stronger, FHA is more important than ever," Castro said. "We see too many Americans today, folks who are ready and responsible to own home who cannot get access to credit. We are pleased that the improvement in the fund means that the FHA is in a good position to fulfill its traditional role."

However, the HUD secretary declined to comment on whether the FHA is prepared to reduce its premiums. Castro said he would "reserve judgment" until the FHA completes a full analysis.

Overall, the new report shows that the economic value of the FHA fund rose to $4.8 billion in fiscal year 2014 from a negative $1.1 billion in the prior year.

The auditors are projecting that FHA will reach a 2% capital ratio and an economic value of $23.4 billion in fiscal year 2016.

FHA's performance would have been better if it hadn't suffered a blow from its reverse mortgage program.

The economic value of the Home Equity Conversion Mortgage program fell from a positive $6.5 billion in fiscal year 2013 to a negative $900 million a year later. FHA officials attributed this drop to projections that higher long-term interest rates will reduce the value the reverse mortgage portfolio.

FHA also experienced a steep drop-off in loan volume from the forward single family program.

Last year, the independent auditors projected that FHA would endorse $191 billion in forward loans in fiscal year 2014. The final count came in at $134 billion.

"We lost a couple billion dollars of value because volume was lower than expected," Acting FHA Commissioner Biriam Gebre told reporters on Monday.

Going forward, the independent auditors that prepared the actuarial report estimate that FHA single family endorsements will total $124 billion next year and $113 billion in fiscal 2016 with the current premium structure.

FHA endorsed nearly 566,500 forward loans in fiscal 2014, compared to 892,400 ten years ago. FHA also endorsed 40,500 reverse mortgage loans in fiscal 2014, compared to 37,800 in FY 2004.

Looking solely at the forward program, the economic value of the single-family program jumped from a negative-7.9 billion to a positive $5.9 billion.

The actuarial review "confirms that the taxpayer is in better shape today and I give FHA credit for that," said Brian Chappelle, co-founder of Potomac Partners in Washington. "Now we need to focus on future homebuyers and a significant premium reduction needs to be part of any solution."

David Stevens, the head of the Mortgage Bankers Association, agreed.

"FHA premiums are currently at an all-time high," said Stevens, a former FHA commissioner. "FHA needs to find the right balance so it can meet its mission and further grow its reserves by sustaining increasing volumes without being adversely selected."

But a policy analyst at FBR Capital expects FHA to move slowly in that direction.

"Even though the MMIF has improved markedly over the past few years, we believe that the FHA will hold prices at or near current levels," Edward Mills said in a report issued Tuesday.

He notes that FHA is focusing its "near-term efforts" on reducing premiums for borrowers who complete housing counseling courses.

Meanwhile, Mills says, the "FHA is ceding market share among more creditworthy borrowers" to private mortgage insurers that can offer lower-cost mortgage insurance on Fannie Mae and Freddie Mac loans.