All of a sudden, with the recent reduction of the FHA annual insurance rate, it seems that all will be right with the world (FHA Premiums). This because apps increased as a result of existing FHA loans refinancing to get the lower annual premiums. This is good for these consumers, and some lenders, but is it good for the FHA insurance fund?
Ironically, those who have argued against the merits of the so called “Trickledown Economics” now use the same logic to tout the restoration of the FHA Insurance Fund. By lowering the premiums, more people can get FHA insured loans. That will result in more money flowing into the fund and bring the fund back more quickly to the required 2% level. Maybe. (I sure hope so!)
On the other hand, why is the fund depleted? The rise in FHA defaults and claims caused more money to flow from the fund than to flow into the fund. That is why FHA had to increase the premiums in the first place, or risk running out of money.
The question is: Are the new home buyers who will be getting these new FHA insured loans better borrowers than those who caused the recent losses? Are the current increases in FHA loan performance and the reduction in defaults and claims the result of better lending rules (QM/ATR) creating better quality loans, or just luck? I believe the former.
Now, we decide to lower the annual premiums to help more borrowers qualify for FHA insured loans. These may be the borrowers who would not have qualified under the new rules without this reduction. Are we again opening the doors to home ownership to the most risky segment of potential home buyers? If so, are we doomed to repeat the disasters of the past? Should we have waited a little longer to allow the FHA fund to become healthier?
If, as a result, the claims and losses rise again there may not be enough money in the fund to cover the losses. Then who pays? We all do; the taxpayers (being mostly the middle class) and the housing/mortgage industry as a whole. Not a good thing.
I repeat it’s time to take a step back and take a look at the big picture. Short term, this FHA premium reduction may help. However in the long run, if we’re not careful about how we review and approve these loans, it can prove to be a death knell to the FHA program. Something none of us can afford.
Please lend responsibly; our future depends on it.