Reports show that FHA loan production has picked up since enacting their annual premium reduction. This suggests that more people are taking FHA-insured loans to finance their homes (FHA Production).
FHA endorsed 102,800 loans in May. A big jump over the 66,300 loans they endorsed in January. Why the jump? A big contributor is obviously the premium reduction. But, did this reduction spark home buying, or loan refinancing of existing FHA insured loans? I believe the latter.
This is further indicated by the drop off in applications toward the end of May, a period when we would normally see applications pick up during the spring home buying season.
When FHA first announced the premium reduction many FHA borrowers who had recently closed their loans decided to take full advantage of this reduction and refinance their FHA mortgages. This artificially increased the number of FHA endorsed loans as they were, in essence, re-endorsing the same loans they had previously insured.
FHA’s applications for purchase loans vs. refinance loans have increased recently, with 64.5% in May, as compared to only 47.5% in purchase loan apps taken in February. Again, this indicates that more FHA loans were refinanced just after the premium reduction took effect. Aside from artificially bolstering FHA loan activity, another effect of the premium reduction is to reduce the funds going into the FHA insurance fund.
Now, the good old unintended consequence. The idea was that although borrowers were to pay less per year into the fund, the increase in FHA loan volume would offset any decline, and actually increase monies flowing into the fund.
Due to this refinancing, and no real, marked increase in new business, the loans that were contributing at the higher rate are now paying the reduced rate. This, in turn, is actually reducing the money flowing into the insurance fund.
The good news is that FHA delinquencies, defaults, and foreclosures are all down to the lowest levels seen in recent years. Is this because of stronger underwriting criteria or the recent rash of refinancing? Will they stay at these levels? I guess we’ll find out over the next few years.
The FHA program is a great resource for first-time homebuyers and those with low to moderate income. It gives many their first chance at the American Dream. For this reason, it is important that it remains solvent and survives. Lenders have the responsibility to provide qualified borrowers with quality, compliant FHA loans.
First-time homebuyers beget second-time buyers, who allow for third-time buyers, etc., etc. etc. However, this domino effect can work against the industry.
Today’s FHA loans must be carefully underwritten to ensure both a consumer’s qualification and their ability to afford and maintain the home. If not, we will again have increased FHA loan defaults that would crash the FHA fund and destroy the program. That is something neither the industry nor the economy can withstand.
Lenders need to be careful, very careful, when making FHA loans. Let’s not repeat the failures of the past. Sadly, although everyone deserves the opportunity, not everyone should own a home and have a mortgage.