In an effort to make home mortgages more affordable for first-time buyers and lower-income families, President Obama is directing the Federal Housing Administration (FHA), by executive order, to reduce its mortgage insurance premiums by 50 basis points from 1.35% to 0.85%.
The cuts, which will take effect January 26, will help more than 800,000 homeowners save up to $900 per year on their mortgage costs and could enable up to 250,000 new home buyers to purchase a home, the administration claims.
‘This step is part of the president's broader effort to expand responsible lending to creditworthy borrowers and increase access to sustainable rental housing for families not ready or wanting to buy a home,’ the White House says in a statement. ‘In the coming months, the administration will be taking additional steps to cut red tape and clarify lending standards to build on the measures announced today. And the administration will continue to urge bipartisan progress in Congress to pass comprehensive housing finance reform legislation that will secure a stable and resilient housing finance system – one that will ensure broad access to mortgages at affordable rates and better serve future generations.’
Existing homeowners who refinance into an FHA mortgage will see similar reductions to their mortgage payments.
The proposal comes at a time when many first-time and lower-income borrowers have been shut out of the market, due mainly to stricter lending standards that are the result of new government regulations requiring lenders to take a deeper dive into applicants' credit histories and more carefully assess their ability to repay. The tighter standards are also partly due to stricter internal lender and investor overlays designed to reduce the risk of loan buybacks.
Now, the administration is seeking to dial-back some of the rules that have made it difficult for lower-income and first-time borrowers to obtain a loan. The Federal Housing Finance Agency recently announced that government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac are now accepting conventional mortgages with a down payment of as little as 3% – or, in other words, a 97% loan-to-value ratio. Several lenders have already announced their intention to offer such loans.
Critics of the plan to lower FHA premiums say it increases the risk of another FHA bailout. In the fall of 2013, 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 in light of major losses stemming from its reverse mortgage program, as well as from a record number of defaults. It was the first time in its 80-year history that the agency had requested a government bailout.
The high number of defaults put considerable stress on the FHA's Mutual Mortgage Insurance (MMI) fund, bringing its capital reserve ratio below the 2% threshold mandated under the Federal Credit Reform Act. The problem was first identified in late 2012, when an independent actuarial report found that the fund was operating at a deficit of $16.3 billion.
Most of the losses in the reverse mortgage program, also known as the Home Equity Conversion Mortgage (HECM) program, occurred when millions of homeowners took out reverse mortgages, opted to take lump sum payments and then ran into financial problems. However, last year President Obama signed into law the Reverse Mortgage Stabilization Act, which gives the U.S. Department of Housing and Urban development (HUD) the power to make changes to the HECM program without congressional approval.
In addition, the administration directed the FHA to increase its premiums in order to get its balance sheet back in order. Lenders and borrowers, however, decried the increases, saying that they made FHA-backed loans too expensive and caused many borrowers to consider private mortgage insurance.
Since then, the FHA's fiscal picture has improved: As of November, the fund had taken in about $21 billion in the previous two years, the FHA said in its annual report to Congress.
Also helping to boost the fund's performance is the fact that delinquency rates for FHA-backed loans dropped 14% during the 12 months ended November – plus recovery rates had improved by 16%, the FHA reported.
What's more, the FHA has seen delinquencies and foreclosures fall dramatically during the past year.
The fund, however, remains below its congressionally mandated level – and although the FHA likely won't need another bailout in 2015, critics of the plan argue that it is too soon to roll back premiums, as the fund remains far from fully replenished.
The administration, however, claims in its release that even with the cuts, the FHA's ‘premium structure will more than cover the related estimated credit losses posed to the insurance fund from newly originated loans, continuing to strengthen the [MMI] Fund and protect taxpayers.’ The administration assures that the MMI fund will remain on a ‘positive financial trajectory,’ as the FHA is projected to add $7 billion to $10 billion to its capital reserves each year due to improved risk management and a stronger housing market.
The push to free-up more credit for ‘underserved’ borrowers has been under way for months: During a speech at the Bipartisan Policy Center 2014 Housing Summit held in Washington, D.C., in September, Julian Castro, secretary for HUD, said the regulatory ‘pendulum has swung too far in the other direction’ and that it's ‘too hard’ for most Americans to get approved for a mortgage.
A month later, during the Mortgage Bankers Association's Annual Conference and Expo, Castro outlined numerous steps the FHA has taken to help free up credit and promote homeownership, as well as to make its regulations pertaining to buyback risk more clear to lenders. This includes an overhaul of HUD's Single Family Housing Policy Handbook. The improvements, he said, include streamlining the compliance process by bringing together more than 900 mortgagee letters and other policy artifacts into a single document.
‘This is an important accomplishment and should give you confidence that you understand FHA's policies and its expectations for compliance,’ Castro told the crowd of mortgage bankers.
In addition, the FHA recently introduced its Supplemental Performance Metric report, which provides ‘a more in depth view of a lender's portfolio performance.’
‘Right now, the FHA relies solely on a metric that compares a lender's default performance against peers in its local market – and this simply doesn't paint a complete picture,’ Casro said, adding that the report ‘addresses this by focusing on a lender's performance compared to those also doing business in the credit score range that FHA is targeting.’
The FHA recently released its Loan Defect Taxonomy, which takes the 99 different codes FHA uses to describe loan defects and boils them down to nine distinct categories. Castro said this ‘new way of looking at loan defects’ is expected to become ‘a critical tool for our partners,’ as it ‘will allow FHA to monitor trends in deficiencies and determine if policies can be enhanced to help lenders avoid deficiencies.’
Although Castro said it was time to get housing finance reform done ‘once and for all,’ most industry watchers are not expecting President Obama to address the topic of GSE reform in his speech in Arizona on Jan. 8. However, it is possible that the President will touch on the topic, as it was the main focus of his speech on housing in Phoenix in August 2013.
During that speech, the president said he supports proposed legislation that would liquidate Fannie Mae and Freddie Mac, in particular the Johnson-Crapo bill (then the Corker-Warner bill), which aims to wind down the GSEs over five years, replacing them with a government guarantor that would act as a backstop in the event of another downturn.
Obama said the bill embodies the ‘four core principles for what I believe reform should look like,’ including the concept of bringing more private capital back into the mortgage market.
‘I know that must sound confusing to the folks who call me a raging socialist every day,’ he said. ‘But just like the health care law that set clear rules for insurance companies to protect consumers and make it more affordable for millions to buy coverage on the private market, I believe that while our housing system must have a limited government role, private lending should be the backbone of the housing market, including community-based lenders who view their borrowers not as a number, but as a neighbor.’
In a statement, David H. Stevens, president and CEO of the MBA, called the measure a ‘win-win’ for all involved.
‘It's good for borrowers and good for [the] FHA, helping the agency stabilize its market share and continue to rebuild the MMI fund,’ Stevens said. ‘Additionally, we were encouraged that President Obama called for GSE reform, which hopefully will spur action on Capitol Hill. And the coming changes to Fannie and Freddie's rep and warrant framework that he mentioned should help lessen the high level of uncertainty lenders face and allow them to use the full extent of the GSE credit box to serve more qualified borrowers.’
Bill Cosgrove, chairman of the MBA and CEO of Union Home Mortgage, added that the measure ‘will have a significantly positive impact for my borrowers and the housing market. Specifically, this will help first time homebuyers by making FHA loans more affordable. Given the timing, just as we begin the spring home buying season, I think today's announcement is just what the market needs.’