FHA Mortgages Recover From Bush-era Losses

FHA Mortgages Recover From Bush-era Losses

Those who support FHA mortgages and the ability of homebuyers to purchase real estate with as little as 3.5 percent down got extremely good news this week: the latest annual report from the FHA showed that the program has now recovered from the policies of the Bush Administration and the massive losses they produced.

For fiscal 2015 – a period which ended September 30 – jubilant HUD officials announced that $19 billion was added to FHA reserves. This means that for the first time since 2008 the FHA’s Mutual Mortgage Insurance Fund now has a capital ratio above 2 percent.

FHA Mortgages & Premium Reduction

When HUD announced a .5 percent reduction in the annual mortgage insurance premium for FHA mortgages earlier this year there were the predictable cries of doom and disaster. The sky was going to fall and, shudder, people who could not repay their debts were going to get FHA mortgages. If only we could get the government out of the mortgage insurance business and turn the lending system back over to the financial overlords on Wall Street who did such a good job before the passage of Dodd-Frank….

Actually, what happened was fairly predictable: you make a product or service more attractive by lowering the price then volume will increase. For the FHA more volume is a very good thing because it means both additional upfront and annual mortgage insurance premiums are being collected. With carefully-qualified borrowers and reasonable economic conditions the result is that reserves will be flooded with capital and that’s precisely what happened.

According to HUD, “FHA’s decision in January to reduce annual mortgage insurance premiums (MIP) by a half a percent stimulated a 42 percent increase in total volume.” For fiscal 2015 the FHA endorsed 1,116,232 loans, up a whopping 329,877 endorsements over fiscal 2014.

HUD is not only endorsing more loans but it’s clear that credit quality has also increased. As an example, in the last quarter of fiscal 2008 borrowers with credit scores at 579 or below represented 23.4 percent of all FHA backed mortgages. For the last quarter of fiscal 2015 that percentage was just 0.2 percent.

Having caught up with the massive losses from the last administration, HUD now has an embarrassment of riches. Although HUD would no doubt prefer not to do so, the FHA program is actually doing so well that it may be ripe for another round of cuts to the annual mortgage insurance premium. The Community Home Lenders Association (CHLA) says the rate should now be reduced to just .55 percent, the rate in place before 2008.

With a .55 percent annual mortgage insurance premium and no past shortfalls to make up HUD might actually be in a position to both lower FHA costs while continuing to increase the capital ratio of its reserve fund. This would be good for the FHA, good for buyers who would prefer lower costs, and very good for sellers who would now find more borrowers in the marketplace competing for a limited supply of homes.

Another FHA Insurance Reduction?

Assuming the overall economy continues its slow and painful recovery, but a recovery nevertheless, more buyers would pressure home prices higher. Higher prices would mean more equity, more equity would mean fewer foreclosures, and fewer foreclosures would mean a reduced number of claims against FHA reserves.

Will HUD once again reduce FHA premiums? Stay tuned and keep your eye on Washington after New Year’s Eve. Curious things can happen in an election year, including sometimes things which are both rational and reasonable.

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