Our country’s approach to housing policy has become severely disjointed — to the point some would label as dysfunctional. It certainly makes no sense to me or to many people I speak with. This is why in June of last year, I blogged about the need to have a discussion about the proper role of the FHA before any premium rate changes were considered and implemented. Why for instance, as pointed out in last summer’s blog, is over 40% of the FHA-insured loans going to people who earn greater than the area median income (AMI)?
Of course this discussion did not happen, and the FHA has just announced a price cut.
The rationale was, as I suspected, that since the FHA exceeded its 2% (or 50:1) risk-to-capital ratio, as reported in the 2016 actuarial report, by cutting its prices, it could pass along the “savings” to consumers. There was no mention that these “savings” would cost consumers approximately $3,400 (the 1.75% upfront MIP multiplied by average FHA loan size) of equity in the home before they even move in and that it would take nearly 7 years to recoup.
In both a recent memo and in a press briefing announcing the MIP price cut, HUD Secretary Castro commented on FHA market share. Is that the proper view of a government agency? Why is the government concerned about taking market share from the private sector? If the private sector can serve a segment of the market on commercially reasonable terms, I would argue that the government’s market share should be close to zero.
In many respects, Fannie Mae and Freddie Mac (the GSEs), representing the conventional market, and the FHA, representing the government, are competitors in the high-LTV space. Within the last couple of years, the GSEs re-entered the 97% LTV market with hopes of providing greater access to credit supported by private capital, such as private mortgage insurance. One effect of the announced MIP reduction would be moving business (primarily purchase transactions) from the GSEs to the FHA and increasing taxpayer risk.
The ratio was, indeed, improved, but not improved as much as was forecast just 1 year ago. Compared to the FHA minimum capital ratio, private mortgage insurers must hold minimum capital equal to approximately 7% (a 14:1 leverage ratio, as determined by the GSEs’ Private Mortgage Insurer Eligibility Requirements or PMIERs). Currently, all private mortgage insurers comfortably exceed this more conservative standard. Despite lower capital requirements, the FHA insures loans for the life of the loan, covers 100% of the loss and is backed by taxpayers’ premiums and an unlimited line of credit from the US Treasury. On the other hand, private mortgage insurers put private capital at risk and reduce credit risk before it is presented to the GSEs, reducing taxpayer exposure.
I was clear in June, and I want to be clear now: The FHA has played and continues to play a very important role in our country’s housing market. As the leader of a private mortgage insurance company, I am not anti-FHA. In fact, over the years, private mortgage insurers have approached the FHA to pursue a more collaborative role in collectively serving our country’s housing needs, though without success. Rather, the debate needs to be around a comprehensive housing policy that includes the proper role for the FHA, the GSEs and private capital. If not now when?Tags: FHA, Homeowner, housing, Housing Market, Housing Policy, Mortgage Education, Mortgage Industry