According to HUD Secretary, Julian Castro, the health of the FHA insurance fund has significantly improved over last year (FHA Fund). This is believed to partly be the result of the previous 50 basis point reduction in the annual mortgage insurance premiums.
With the fund improving, might we see another premium cut? That would benefit first time home buyers by helping to make homes a little more affordable.
Anytime you provide a benefit to help get more first-time buyers into the market, you also benefit move up buyers as it becomes a little easier to sell their homes. More buyers mean more sales and more mortgages. That’s good news for everybody.
The key is in the overall health of the fund. Although it has improved, it is still below the required reserves limit of 2%. It was projected that with the premium cut and increased FHA insured business, the capital reserve ratio would reach about 1.4% in 2015. That’s still a little shy of what is required by statute.
The results should be available sometime in November. So, we will get a better idea of the actual position of the fund and if, just maybe, the FHA might consider another premium reduction. Right now, they are being tight-lipped about any cuts.
The health of the fund and the fate of any potential for premium reductions lies in the quality of loans which have been insured by FHA over the past year or so. These loans were made to the borrowers who most benefited from the premium reduction. If these loans perform as expected, the fund should gain as there will less of a drain from defaults and related FHA claims.
Defaults and claims are down now because of a tightening of credit standards and some reluctance of lenders to originate FHA loans at the lower credit scores due to the QM and ATR rules. Remember them?
Further, due to these tighter credit standards, many conventional borrowers ended up with FHA loans. To some extent, this helped to strengthen the fund. The more FHA loans originated, the more money flows into the fund.
On the other hand, these same loans may prove to be a bigger drain on the fund, if they do not perform as expected. Although the loans are paying a lower amount into the fund, if they default, the cost of the related losses will be relatively the same as in the past. Fewer defaults could cause a bigger strain on the fund.
Let’s hope the FHA-insured loans originated over the past year, by mostly Independent Mortgage Lenders, are of a quality that will ensure adequate performance. That way, they may continue to contribute their annual reduced premium into the fund. If so, the FHA insurance will continue to grow and we may benefit from another FHA premium cut.
An improving economy will help with job and wage growth. This will assist these homeowners to continue to afford and maintain their homes.