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The Federal Housing Administration is facing severe challenges next year as some pressure it to lower premiums to deal with new competition from the government-sponsored enterprises, even while its insurance fund remains weak and it faces added scrutiny from GOP lawmakers.
December 19 -
The 3%-down payment mortgage has been made available to consumers with a speed rarely seen in this business, in large part because more lenders than ever are selling loans directly to Fannie and Freddie.
December 24
WASHINGTON President Obama is expected to announce a half-percentage-point reduction in the Federal Housing Administration's annual premium during a housing policy speech Thursday in Phoenix.
Housing and Urban Development Secretary Julian Castro confirmed the premium reduction in a prepared statement late Wednesday.
"This action will make homeownership more affordable for over 2 million Americans in the next three years," Castro said. "Since 2009, the Obama administration has taken bold steps to reduce risks in the mortgage market and to protect consumers. These efforts have made it possible to take this prudent measure while also ensuring FHA remains on a positive financial trajectory. By bringing our premiums down, we're helping folks lift themselves up so they can open new doors of opportunity and strengthen their financial futures."
Industry observers have predicted the president would seek to lower FHA premiums.
"The White House has vaguely mentioned going around Congress to take actions administratively and lowering FHA premiums would fit the bill," KBW analysts Brian Gardner and Michael Michaud wrote in a Jan. 4 report. "It is an idea that has been pushed by congressional Democrats and the Mortgage Bankers Association. If President Obama does mention this then we think it could positively impact the mortgage lenders, title insurers and homebuilders."
In 2013, the president talked about making it "easier for qualified buyers to buy homes" and strengthening the FHA to help first-time homebuyers.
But FHA mortgage insurance premiums continue to be very expensive and lenders offering Fannie Mae and Freddie Mac-guaranteed loans continue to restrict credit to borrowers with the highest credit scores.
"We believe President Obama will discuss the improved state of the housing market, highlighting on-going policy efforts aimed at expanding mortgage credit availability, and once again express his desire for comprehensive mortgage finance reform," said Compass Point Research and Trading analyst Isaac Boltansky.
The FHA experienced a surge in volume of the loans it insures after private sources of mortgage credit dried up during the housing crisis. But house prices continue to fall and defaults increased, eventually wiping out the FHA's capital reserves. To replenish the fund which still remains below its statutory minimum capital ratio of 2% the FHA raised its upfront and annual premiums. As of Sept. 30, FHA's capital ratio was a positive 0.41%.
More recently, the FHA has faced competitive pressure from Fannie and Freddie, which recently introduced low-down payment products. Castro is expected to appear alongside Obama at the Phoenix event, one in a series of policy speeches the president is giving around the country ahead of the Jan. 20 State of the Union address.
Jaret Seiberg, an analyst with Guggenheim Partners, said he expected the president would announce a 50 basis point cut to the FHAs annual premium.
"We believe the cut is strategic," Seiberg wrote in a note to clients on Wednesday. "Our view is that FHA was at risk of losing enough market share that it could have put at risk the ability of the FHA fund to reach its 200 basis point reserve requirement this year as it had forecast. By cutting the premium, FHA would increase its share of the market and should be back on track to meeting the reserve requirement despite the cut in revenue."
Republicans lawmakers are certain to object to the plan. They have repeatedly urged the FHA not to cut premiums until its fund reaches its statutory minimum. The fund's ratio is at 0.41%, well below the 2% threshold. But consumer and housing groups have lobbied FHA to cut premiums now to boost credit availability.
Meanwhile, private mortgage insurance firms' stock prices took a hit Wednesday morning over concerns that an FHA premium cut would make those loans more competitive with the mortgages that the government sponsored enterprises purchase and PMI firms insure.
However, the Federal Housing Finance Agency is considering proposals to reduce the guarantee fees the two GSEs charge including their upfront fees, which are known as loan level price adjustments. FHFA is likely to consider the reduction in FHA premiums as it adjusts the G-fees and LLPAs for Fannie and Freddie.
In February 2013, the Community Home Lenders Association urged the Obama administration to reduce the 135 basis point annual premium to 75 basis points to make FHA-insured mortgages more affordable. It also advocated a 50-basis-point reduction for homebuyers that complete HUD-approved homeownership counseling and suggested the FHA could raise its upfront fee (currently at 175 basis points) to recoup some of the revenue lost from the reduction in the annual premium.
The lagging housing market continues to be a drag on economic growth, spurring interest from Washington observers into what the White House plans to do to address it. Even some of Obama's liberal supporters have criticized the administration's record on housing, including the Center for American Progress.
"Our nation's housing recovery is neither strong nor equitably distributed. Not only has the mortgage market shrunk nationally, but many communities especially communities of color also lag far behind other parts of the country, with hard-hit neighborhoods continuing to suffer the ongoing effects of multiple foreclosures, negative equity, vacant homes, and blight," Julie Gordon, CAP's director of housing finance and policy, said in prepared testimony for a Dec. 9 Senate Banking Committee hearing. "We have turned back the clock nearly 20 years on homeownership rates, and rental costs are soaring relative to incomes."
Phoenix has experienced the worst of the housing bust in terms of plummeting home prices and high foreclosure rates. But this Sunbelt city also rebounded more quickly than many parts of the country.
"Phoenix has led one of the biggest comebacks in the country," Obama said during his August 2013 visit to the Arizona city. "Home prices have risen by nearly 20% over the last year. New home sales are up by more than 25%," the president said nearly a year and a half ago.
Since then, the housing market has cooled and prices in Phoenix are up just 2.1% over the past 12 months ending in October 2014, according to the latest reading of the S&P Case-Shiller house price index.
"Historically, the housing sector has led economic recoveries following downturns. Unfortunately, the market is not yet strong enough to play that role, which is one of the reasons why the overall recovery still has a lot further to go," said Gordon.
