Mortgage originations among borrowers in the 620 to 680 credit score range have plunged some 90 percent since the housing crisis in 2007 and still have far to go before they recover. One thing that’s holding back these borrowers is a series of increases in FHA’s mortgage insurance premiums. They’ve been raised five times since 2010 and today they cost borrowers about 85 basis points more in fees than before.
That might not sound like a lot, but it translates into about $100 a month in additional out-of-pocket costs for borrowers, assuming a home price of about $150,000. An additional $1,200 a year is not a small amount of money for moderate-income households struggling to become homeowners.
Without a doubt, FHA needed to raise premiums. In the aftermath of the housing crisis, the agency stepped up when lenders fled the market and shouldered a good portion of the originations market. In doing that, it helped prevent a further meltdown in the economy, but it also took a hit to its reserves. Ironically, the most pressure on its reserves came not from purchase-money originations but from the agency’s reverse mortgage program, which lets homeowners who’ve paid off their mortgage draw money out in monthly installments. As home values dropped after the crisis, FHA’s reverse mortage program absorbed losses, affecting the agency’s reserves across the board.
All this came to a head last year when FHA had to take a draw on its Treasury line to cover a decrease in one of its reserve accounts.
To be clear, FHA has close to $50 billion in reserves, and last year when it took the draw it had tens of billions in reserves. But federal rules require the agency to maintain a 30-year reserve fund for all the insurance it has in force plus maintain an additional 2 percent reserve on top of that. That’s a safety requirement that far exceeds anything any private financial institutions have to meet, so FHA was never in dire financial trouble. The Treasury draw was a needed response to what is really a technical budget requirement that the agency has to meet.
In any case, NAR is in communication with the agency about the need to pull back on premiums now that the agency is on track to reach sound financial footing again. NAR’s position is that FHA must balance its two goals, which are, on the one hand, to meet the needs of borrowers who rely in it for financing, and, on the other, to maintain the soundness of its finances. It’s a balancing act, and NAR believes the agency has appropriately shored up its finances and can now ease some of its premium increases.
In the video above, Sarah Young of NAR Government Affairs talks about the impact of the premium increases on borrowers with Brian Chappelle, a recognized FHA expert.