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HUD/FHA announced on Jan. 28th, that it will be lowering mortgage insurance rates for multifamily (5 or more units) mortgages in an effort to increase multifamily loan originations.
This could result in the rehabilitation of as many as 12,000 additional units of affordable housing per year on a national basis.
Default/claim rates on the FHA multifamily loan portfolio have traditionally been very low and excess revenue has been generated for the US Treasury each year from FHA’s multifamily business.
Of course, you will not read many articles touting the success of a Federal Government Agency actually generating revenue for the US Taxpayers.
Before the ink was dry on HUD’s Jan. 28th press release, many housing advocates and lobbyists have demanded that HUD/FHA needs to make further cuts in either its annual or up-front Mortgage Insurance Premiums (MIPs) on its single family (1 to 4 unit) loan programs.
HUD did reduce its annual MIP charges on FHA single-family loans in January 2015. The HUD Secretary (Julian Castro) received much criticism at that time from some Congressmen and conservative “think tanks” since the fund was still below the congressionally mandated 2% capital ratio threshold.
At the time, the reduction in MIP helped spur an increase in FHA loan originations which helped contribute to an increase in the capital reserve ratio to 2.07% by November 2015.
Using this recent example of how reductions in MIP can result in more FHA loan originations and revenue, some would argue that the time is right to make additional MIP reductions.
After all, it is a presidential election year and this news would be well received by many industry groups as well as prospective homebuyers.
However, in my opinion, it is doubtful that FHA will reduce either it’s annual or up-front MIP for quite some time (if at all).
The primary reasons that I believe that FHA will not reduce their current MIP charges are as follows:
- It has only been a short period of time that FHA has been above the 2% capital reserve threshold – it would be advisable to see if this trend continues for several months.
- A major factor of the increase in the FHA’s capital reserve fund was due to actuarial changes/swings in its Home Equity Conversion Mortgage (HECM) portfolio. Going forward, if home values fail to appreciate (or decline) or default/claim rates on HECMs (or reverse mortgages) increase – the 2% capital reserve threshold would be greatly threatened because of the large role HECMs currently play in this calculation.
- Competition from Fannie Mae’s Home Ready program, as well as other low down payment conventional financing options, could impact FHA’s loan volume. Keep in mind that FHA recently implemented many underwriting changes (as of 9/14/15 in their 4000.1 HB) that will make it difficult to qualify prospective borrowers – such as counting deferred student loans in the qualifying ratios.
Loading ...Mortgage Insurance Premiums for FHA loan transactions should be reasonable and be reflective of the inherent risks involved with that type of financing (Note: FHA’s minimum investment requirement is only 3.5%).
Many folks forget about past efforts years ago to eliminate FHA! Therefore, it is important for the future of FHA that the Capital Reserve Ratio remains above 2%. That helps to keep FHA financially sound and able to play its critical and traditional counter-cyclical role in the marketplace.
Cutting premiums at this time would, in my opinion, be very risky.
Stay tuned
