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Mortgage underwriting overlays are not only tighter than they were precrisis, they're more restrictive than they were 15 years ago a trend that Department of Housing and Urban Development Secretary Julian Castro wants to change.
September 22 -
In his first major policy speech as the new housing secretary, Julian Castro voiced support for a Senate bill to reform housing finance and said policymakers should "remove the stigma associated with promoting homeownership."
September 16 -
A high percentage of Federal Housing Administration-insured loans are falling into the "higher priced" bucket due to a series of mortgage insurance hikes over the past several years.
September 24
WASHINGTON The Obama administration is pushing to ease access to mortgage credit, particularly for first-time homebuyers, but it doesn't appear likely it will employ one of its most readily available tools.
Observers said a reduction in high premiums for Federal Housing Administration loans could make loans more affordable and increase the pool of eligible borrowers.
Yet for now, at least, the Department of Housing and Urban Development appears unlikely to make such a reduction, fearing a political backlash from Republican lawmakers.
"It puts political pressure on HUD if they lower the premiums," said David Stevens, the president of the Mortgage Bankers Association and former head of FHA.
GOP lawmakers have already raised fears about a potential premium cut, arguing the FHA's mortgage insurance fund is still dangerously low. By statute, the fund is required to maintain a 2% capital ratio. But the agency's capital was wiped out in the wake of the financial crisis due to high defaults and foreclosures, falling to -0.11% at the end of fiscal year 2013.
The FHA raised premiums to help restore the fund, but it's not clear whether it's hit the minimum yet. HUD is waiting to see a new report on the financial condition of the fund due in mid-November.
Some analysts said it may reach its target by next year.
"It is still recovering and might reach the 2% ratio in 2015," according to Isaac Boltansky, Jason Stewart and Amy BeBone, analysts with Compass Point Research and Trading.
"Our view remains that the FHA will lower its MIPs [mortgage insurance premiums] in 2015 if the actuarial report shows the MMIF's capital position has improved," the three wrote in a note earlier this month.
They said the FHA will likely "embrace" an "incremental approach" to reducing the premiums.
The MBA's Stevens indicated that policymakers may adjust the premiums so that the growth of the capital reserve is fast enough to "avoid political retribution."
Mark Zandi, the chief economist for Moody's Analytics, said that FHA is nearing the point where its "extraordinarily high" mortgage insurance premiums could be reduced to 50 basis points.
FHA currently charges annual and upfront premiums that total 170 basis points assuming a five-year mortgage life.
"The FHA could lower its combined premiums to 120 bps and still build the insurance fund adequately to protect taxpayers in the case of another Great Recession," according to Zandi's report, which was released Wednesday.
Stevens supports such a move. If premiums can be reduced by 50 basis points and the fund is still actuarially sound, that says a "lot of good qualified families are being overcharged for the mistakes they never made," he said.
But others are not so sure the FHA should make such a move.
Chris Flanagan, the head of U.S. mortgages and structured finance at Bank of America Merrill Lynch Global Research, said it is too early for FHA to reduce its premium in the current "political landscape."
He noted FHA still has serious credit problems and should continue to rebuild its capital.
"If they lowered their premiums now and start seeing defaults creep up, it would be very damaging," he said in an interview.
HUD Secretary Julian Castro may be reluctant to make a reduction too quickly considering the political liability he could face. The new HUD secretary is already viewed as a possible running mate for Hillary Clinton in 2016, although he has said he wants to be the next governor of Texas.
Still, if Castro authorizes a reduction in premiums and the FHA fund falters, it could provide ammunition for the GOP.
FHA continues to serve a large percentage of first-time homebuyers as it did before the housing bust. The latest HUD data shows that 80% of FHA loans go to first timers. However, FHA endorsed 480,650 purchase mortgage loans during the first 10 months of fiscal year 2014 ending in July, compared to 949,295 during the same period in fiscal year 2010.
Meanwhile, Fannie and Freddie are expected to come out with new low-down-payment loans designed to ease access to credit. These products are expected to feature 3% downpayments with "deep" private mortgage insurance, according to sources.
However, the average FICO score on a Fannie Mae and Freddie Mac guaranteed loan in the second quarter was 744 and 742 respectfully, while the average credit score on an FHA-insured loan is 681.
The MBA applauds the GSEs for bringing these low downpayment products back, Stevens said in an interview.
"One of the biggest barriers to access to homeownership is downpayments," he said.
But it won't help borrowers with lower credit scores.
"Those borrowers will have go through the FHA," Stevens said.
