Trending these days in Washington, D.C is that many prospective home buyers are being denied access to credit for various reasons including more restrictive lending criteria, higher premiums, and others. In light of this, I believe that the time is right for FHA to give serious consideration to reducing its up-front Mortgage Insurance Premium (MIP) (currently at 1.75%) and/or lowering its annual MIP factors.
These higher fees are limiting access to FHA insured loan financing for many borrowers – especially first-time homebuyers. Carole Galante, the current FHA Commissioner who announced that she is leaving the Department by the end of the year, recently stated that these higher premiums are needed to help meet FHA’s statutorily mandated 2% capital reserve ratio.
However, financial reports from HUD indicate that its most recent book-of-business is looking good and that this 2% threshold may be met as early as fiscal year 2015. In a March 2014 press release on HUD’s Fiscal Year 2015 budget, it is stated that FHA will end the year with a capital reserve balance of $7.8 billion and will not need a mandatory appropriation from the U.S. Treasury.
Even a small reduction in MIP charges for FHA borrowers will help with the negative perception that FHA loans are too expensive. These perceptions began in earnest when HUD eliminated refunds of its upfront MIPs for mortgages endorsed on or after December 8, 2004 and ruled that borrowers must pay annual premiums over the life of the loan (for loans obtained after May 2013).
Perhaps FHA will consider reducing its MIP when its next actuarial report is issued (targeted for November) if reports continue to indicate that the overall slowdown in mortgage lending will continue throughout the coming year. This actuarial report is expected to validate that the overall health of the MMI fund has improved.