HUD/FHA announced that its Mutual Mortgage Insurance Fund (MMIF) greatly increased in Fiscal Year 2015 to a level above its congressionally mandated capital ratio target of 2%, on Monday, November 16, 2015.
Although the mortgage industry has been aware of the fact that FHA’s market share had increased subsequent to their lowering of the annual mortgage insurance premiums (MIP) in January 2015, this announcement caught many folks off guard and came quite as a pleasant surprise.
Back in January 2015, HUD Secretary Julian Castro received much criticism from some groups for reducing the annual MIP before the fund had reached the 2% capital ratio threshold. This was a bold move at that time but can now be regarded as the catalyst for substantially increasing FHA loan production and reserves. This resulted in this higher capital ratio threshold.
In 2014, the capital ratio was only .41% while Monday’s announcement indicates it is now at 2.07%. FHA has also recently implemented some conservative underwriting criteria such as: counting deferred debt (i.e. student loans) in calculating a borrower’s debt ratio, requiring source of funds documentation if deposits exceed 1% of the sales price, mandating a financial assessment of reverse mortgage borrowers, etc. These new requirements should help improve the overall quality of loans that FHA insures thus reducing default/claim rates in the future.
Of course, there will be many community groups that will demand that FHA cut MIP rates even further and use Monday’s announcement as an example of how cutting MIP rates (either annual or upfront) can result in a better financial position for the MMI Fund. However, in my opinion it is doubtful that FHA will reduce either the annual or upfront MIP for quite some time.
Right now, FHA is in a sound financial position and should continue to build on that as more and more Millennials begin buying their first home. FHA’s traditional role is not to have a dominant share of the mortgage market but should be a viable option for underserved borrowers and those with lower credit scores than the minimum credit score overlays imposed by conventional lenders.
There are a number of factors that should influence FHA’s decision whether or not to reduce their current annual or upfront MIP structure going forward. Rising interest rates, increasing/decreasing property values, default/claim ratios, the volatility in the reverse mortgage market (FHA plays a dominant role in this market), access to credit, the economy & overall job market and loss of higher paying jobs, etc. are all factors that will influence the future financial status of the MMI Fund.
I would think that FHA will want to wait sometime to assess the overall trend in their capital ratio and will consider reducing MIP rates only if the capital ratio continues to grow well beyond the 2% threshold.