Mortgage Experts: FHA Rate Cut Comes At Perfect Time


When the Federal Housing Administration (FHA) announced in November that its Mutual Mortgage Insurance Fund (MMIF) had reached a capital reserve ratio of 2.32%, up from 2.07% in 2015, it led to cries from the housing and mortgage industries that it was high time for the FHA to reduce its mortgage insurance premiums (MIPs).

Still, some expressed concern over instability in the FHA’s Home Equity Conversion Mortgage (HECM) program – which was the cause of some of the losses that the MMIF incurred during the years following the start of the Great Recession. Those losses, in addition to deep losses resulting from defaults and foreclosures on FHA-backed loans, are what resulted in the FHA needing a $1.7 billion infusion of capital from the U.S. Treasury in order to shore up its reserves in 2013.

Well, last week, those who had pushed for the reduction got what they asked for: The FHA announced on Friday that it was reducing annual premiums for most borrowers by 0.25%. The rate cut takes effect on Jan. 27 and will be applied to FHA-backed mortgages originated on or after that date. The FHA says the reduction – which brings annual premiums from 0.85% to 0.60% – will save FHA-insured homeowners, on average, about $500 this year.

Many in the industry say the cut is much needed because it will help offset the impact of rising interest rates. What’s more, in a statement, William E. Brown, president of the National Association of Realtors, says the rising cost of mortgage insurance has shut many first-time and lower-income buyers out of the market. With the announced cut, “Now, we have a real opportunity to get back on track,” he says.

During an interview with MortgageOrb, Alice Alvey, master CMB and senior vice president of mortgage outsourcing, compliance and technology firm Indecomm Global Services, says she agrees that now is a good time for the FHA to cut its premiums, from “both a market perspective and in looking at the stability of the MMI Fund.”

“The first time home buyer who doesn’t fit the government-sponsored enterprise [GSE] guidelines can leverage FHA, and at the same time, the lender will have 100 percent insurance coverage,” Alvey tells MortgageOrb. “This is a win-win to open up this market to more borrowers. In addition, the actuarial report has shown that FHA delinquency, and foreclosure problems from the days of down payment assistance programs, are far behind them now. The loan quality has greatly improved with the underwriting changes over the last several years, and the industry can be confident that this change should not negatively impact the stability of the fund.”

Pamela Bates, national underwriting manager for Castle & Cooke Mortgage, says she, too, agrees that the time is ripe for the FHA to cut rates and take advantage of its position to help underserved borrowers.

“This could be a political move to show that the department thrived under President Obama; however, the fund is over the required two percent reserve minimum – so yes, the timing is correct, in my opinion, to pass along the savings to the borrowers,” Bates tells Orb. “It is certainly a good thing for loan officers and companies of all sizes that are providing FHA loans.”

But does a reduction of 0.25% – for a total savings of about $500 a year (enough maybe for a car repair) – really do enough to help the average FHA borrower?

“It is a good first step,” Alvey says. “There are many assumptions made regarding future market conditions when FHA walks through the calculations for the MMI Fund. If the market performs as expected and new volume can feed the fund, then we can ask them to go back to the table and sharpen their pencil.”

Bates points out that at 2.32%, the fund has enough meat on its bones so that it can be decreased slightly. “The fund is required to be at a two percent reserve minimum, and it is currently at 2.32 percent,” she says. “This is based on a reserve of the total FHA insurance in force and is carefully monitored.”

But what of those concerns over the health of the HECM program? Are those concerns still warranted?

“The HECM program has its own set of problems that aren’t simply tied to the amount of the annual MIP,” Alvey says. “The program needs a thorough analysis to ensure that the lenders offering these loans are properly serving the borrower. The program is significantly dependent on market conditions, high-quality originations and servicing expertise. The focus should be on fixing those areas.”

When asked if this rate cut helps the FHA “compete” better with the new, low-down payment programs being offered by the GSEs – and, further, if it helps the FHA better meet its goal of serving the underserved – Alvey responds, “Yes and maybe.”

“It certainly helps to work toward the goal of serving the underserved,” she says. “It remains to be seen if it will actually meet the goal. More should be done to identify ways lenders can be better prepared to manually underwrite quality loans. The many recent [U.S. Department of Justice] actions against lenders [regarding faulty underwriting of FHA-backed loans] can deter good companies from manually underwriting FHA. This is a fading product that is needed to help the underserved. The annual MIP reduction is just one step in opening up the program for more borrowers.”

Bates says she doesn’t see this cut in any way resulting in the FHA “competing” against the GSEs’ 3% down programs, “as most of the GSEs use the FHA loan as their main model for financing and provide additional down payment assistance programs, rather than competing directly with the FHA loan.”

“I do feel that this savings will help provide more homeowners the ability to qualify for a mortgage, thanks to the reduced premiums and lower payments,” Bates adds. “Younger, creditworthy families and first-time home buyers will especially be helped.”

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