With the Mutual Mortgage Insurance Fund (MMIF) getting healthier, the Federal Housing Administration (FHA) is reducing annual premiums for most borrowers by 0.25%.
“After four straight years of growth, and with sufficient reserves on hand to meet future claims, it’s time for FHA to pass along some modest savings to working families,” says Julian Castro, secretary of the U.S. Department of Housing and Urban Development (HUD), in a statement released Friday. “This is a fiscally responsible measure to price our mortgage insurance in a way that protects our insurance fund, while preserving the dream of homeownership for credit-qualified borrowers.”
The FHA says the reduction, which takes effect starting Jan. 27, will save FHA-insured homeowners about $500 this year. Part of the purpose in cutting premiums is to offset the impact of rising interest rates.
Following the financial crisis that began in 2008, the MMIF went into the red, due primarily to borrowers defaulting on their FHA-backed mortgages but also due to losses in the FHA’s reverse mortgage (HECM) program. In 2013, after the fund dipped to below its mandated reserve level of 2%, the FHA requested – and was granted – a $1.7 billion infusion of capital from the U.S. Treasury in order to shore up its reserves. It was the first government bailout of the FHA in the agency’s 80-year history.
Since then, the FHA has been implementing a variety of fiscal measures to bolster its reserves to above the 2% threshold mandated under the Federal Credit Reform Act, including raising premiums and stemming losses in its HECM program.
And those measures have been paying off: According to an independent actuarial report released in November, the fund grew by $3.8 billion during the 12 months ended Sept. 30, 2016, and stood at 2.32%, up from 2.07% in 2015. Following the release of that report, many housing industry and mortgage experts said it would be an opportune time for the FHA to once again reduce its insurance premiums so as to stimulate more home buying. The last time it cut premiums was in January 2015, when the Obama Administration directed the FHA to reduce premiums by 50 basis points, from 1.35% to 0.85%.
On Friday, the FHA announced that the fund gained $44 billion in value during the four fiscal years ended Sept. 30 and that it was time to pass some of that on to consumers.
The decrease from 0.85% to 0.60% “comes at the right time for consumers who are facing higher credit costs as mortgage interest rates are increasing,” the FHA says in its release.
“We’ve carefully weighed the risks associated with lower premiums, with our historic mission to provide safe and sustainable mortgage financing to responsible home buyers,” says Ed Golding, principal deputy assistant secretary for HUD’s office of housing. “Homeownership is the way most middle-class Americans build wealth and achieve financial security for themselves and their families. This conservative reduction in our premium rates is an appropriate measure to support them on their path to the American dream.”
In a statement, David H. Stevens, president and CEO of the Mortgage Bankers Association, says, “The reduction in the premium is a result of our industry’s and FHA’s shared commitment to quality underwriting, and consumers will benefit as a result.
“Reducing the cost of FHA loans benefits borrowers, but other changes to reduce uncertainty for lenders would be required to truly invigorate the FHA program,” Stevens says. “[The] MBA looks forward to continuing to work with all stakeholders, including the new administration, to ensure the safety and soundness of the FHA program.”