Hope of FHA Refi Boom Grows on Eve of Premium Cut

WASHINGTON — Analysts are predicting immediate interest in obtaining new Federal Housing Administration loans when the agency's 50-basis-point premium cut goes into effect Monday.

The FHA has been allowing lenders to cancel loan case numbers so that they can obtain a new case number, starting Monday, to ensure applicants can take advantage of the premium reduction.

Mortgage industry consultant Brian Chappelle predicted a "big spike" in new case numbers as soon as the premium reduction is effective. He said the FHA had issued instructions for handling bulk cancellations and said so far the process "is working well."

"Between Jan. 26 and the end of February, FHA could receive 150,000 requests for new case numbers," Chappelle, co-founder of Potomac Partners in Washington, said in an interview.

According to some projections, over a million existing FHA borrowers could benefit from the lower premium — totaling 85 basis points — which Housing and Urban Development Secretary Julian Castro announced Jan. 8.

Economists are more optimistic about growth in refinancing than the lower pricing driving new home purchases. The reduction in the FHA annual mortgage insurance premium is only expected to boost home sales by 50,000 to 100,000 units this year. In fiscal year 2014 the FHA endorsed nearly 600,000 home purchase mortgages.

The premium cut is not a "game changer" when it comes to boosting home sales, Moody's Analytics chief economist Mark Zandi said at a housing event Thursday evening.

But it is still "definitely a step in the right direction," he added. Zandi said the lower rate is a draw for first-time purchasers.

This is "very important for first-time homebuyers and low-income households. They have gone AWOL" in this housing market, Zandi said at the event sponsored by the Urban Institute and CoreLogic. "It is one of the key reasons" the housing recovery has been so slow.

HUD officials estimate the FHA premium reduction will boost home sales by 250,000 units over the next three years.

Meanwhile, FHA has endorsed around 1.2 million single-family loans since the spring of 2013, when the agency announced its last premium increase.

FHA raised its annual premium by 10 bps to 1.35% on June 3, 2013 and it also implemented a policy that requires borrowers to pay the annual premium over the life of the loan. The government-sponsored enterprises Fannie Mae and Freddie Mac do not require borrowers to pay mortgage insurance premiums after the loan-to-value ratio falls below 80%.

Chappelle said borrowers that took out FHA-insured loans in the later part of 2013 and during last year will be prime candidates for refinancing. "They will get the full 50-bp premium reduction and a low mortgage rate," he said. Chappelle also noted that these borrowers are already saddled with the requirement to pay annual premiums payments over the life of the loan.

Refinancing applications already jumped following Castro's announcement. During the week that ended Jan. 16, applications for FHA refinancings rose 57% from the prior week, according to the Mortgage Bankers Association. FHA purchase applications were down 1%.

MBA chief economist Mike Fratantoni noted that the reduction in premiums is making FHA-insured purchase loans more competitive with conventional loans guaranteed by Fannie and Freddie.

"Some of these loans would have gone conventional and now they will go FHA because of the lower cost," the chief economist said in an interview.

Before the FHA premium reduction, borrowers with a credit score above 680 were better off with a conventional loan. "Now that line has moved closer to 720," Fratantoni said.

But if FHA-backed mortgages get a leg up on Fannie and Freddie loans, it may not be for long. The Federal Housing Finance Agency — which regulates the two GSEs — is considering reducing the guarantee fees Fannie and Freddie charge on single-family loans.

"There is a better than even probability that FHFA will lower the G-fees, the loan level price adjustment or adverse market fee," Zandi said. As a result, he added, the impact on market share between FHA and the GSEs will be "unchanged."