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Some in the housing and lending industries are clamoring for a further reduction in the initial or annual FHA mortgage insurance premiums. The belief is that with the increase in FHA insured loans, helped greatly by the last reduction in the annual premium, FHA has achieved and maybe surpassed the 2% capital reserve requirements.
The Community Home Lenders Association (CHLA) believes FHA should allow the annual premium to cease once the loan reaches 78% of the value of the home (78% LTV). By then, the borrower has achieved a satisfactory equity level, which coupled with the initial and annual premiums already collected, should be enough to offset any loss from default. Sounds reasonable.
That may be so, but according to Deputy Principle Assistant Secretary for HUD (where do they get these titles), Edward Golding, now is not the time to do any more cutting. He testified before the House Financial Services subcommittee recently and advised that many FHA borrowers default much later than people expect. What does that mean?
Seems odd. If the reserve is determined by an anticipated percentage of defaults, what’s the difference when they default, the reserves should be adequate to cover the anticipated losses. Plus, the later the default, the more equity in the property. That should help offset any losses as well. Hmm.
However, CHLA had better be careful. It seems, this push to reduce premiums now has some in Congress looking to actually increase the demands for these FHA premiums. During the hearing, two Congressman said they think that the reserve requirement should be increased to 4%, doubling the required FHA housing fund reserves.
This means the life of loan annual premium would continue plus the initial or annual premium may need to be increased, especially if FHA loans continue to default later than expected. The 4% reserve could help FHA become, or, at least, appear to be, more stable, but what would the effect be on housing and mortgage lending? I suspect not very good, to say the least.
Could this be just another tax on homeownership? Would we have those who do not default pay higher premiums for a longer period so FHA can continue to insure loans for those who may default?
I guess it might be a good plan if we continue to get enough home buyers who can afford, and continue to maintain, their homes at the higher, longer lasting, FHA premiums. Maybe they believe they’ll just make it up in volume.
For now, FHA premiums will remain the same. Lenders need to do their part to help ensure that they will by closing quality compliant loans made to borrowers who qualify, can continue to maintain their home, make their payments, and not go into default.
That will continue to bolster the FHA fund to help it maintain adequate reserves against reduced defaults, which may allow for some further cuts in the premium or length of time it must be paid.
Quality is the key. Lend responsibly my friends.
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