Higher FHA mortgage premiums unneeded and unjustified

Moving with great speed, the FHA has decided to raise the annual mortgage insurance premium (MIP) fee by .25 percent. This will increase monthly FHA costs by some $30, an additional financing expense of around $360 a year for new FHA borrowers, individuals who typically are not among the rich or famous.

And who will benefit? That would be the nation’s private lenders, TARP money recipients and payers of executive bonuses. Let me explain:

FHA Reserves

Every insurance program is supposed to have a reserve account to pay off claims. The FHA mortgage loan program is really an insurance plan — the government insures loans made by private lenders. In exchange for a lower down payment borrowers pay both an up-front mortgage insurance premium and an annual insurance premium (MIP).

The Mutual Mortgage Insurance(MMI) fund is supposed to be a reserve equal to 2 percent of all outstanding FHA loans. The money for the MMI fund comes from the collection of FHA insurance premiums. The higher MIP premium — that additional .25 percent — will boost FHA reserves.

But is that necessary?

“The MMI fund,” says FHA Commissioner David H. Stevens, “has been below the two percent threshold in our last two annual actuarial reports to Congress.”

It is now 2011. Just how long would it take for the fund to reach the magic 2 percent level without any premium increase?

“Under conservative assumptions of future growth of home prices,” HUD told Congress last year, “and without any new policy actions, FHA’s capital ratio is expected to approach two percent in 2014 and exceed the statutory requirement in 2015.”

If the FHA does not raise the annual premium, does not increase costs for new borrowers by $360 a year, the reserve will reach 2 percent around 2014. In effect, without the premium increase the FHA expected to collect more reserve money then it paid out in claims otherwise reserve levels could not increase.

Other Reserves

No less important, HUD has a variety of reserves in addition to the MMI — and they are growing. Again, from last year’s report to Congress:

HUD says that “due in large part to the performance of recently originated loans, FHA’s total capital resources increased by $1.5 billion since last year, to $33.3 billion, and are at their highest level ever – $5.5 billion greater than predicted last year. If the economy were to suffer a further significant downturn, recovery of the capital ratio could be delayed beyond the projected timeframe. However, even in the actuaries’ worst-case stress test scenario, FHA’s capital resources remain sufficient to cover projected claim losses and FHA would not require a taxpayer subsidy, an improvement over last year’s assessment and due to new loans having higher credit quality than had been anticipated.”

$10 Billion

The reality is that the FHA is doing remarkably well. As Commissioner Stevens just testified, the “FHA is projected to generate approximately $9.8 billion in receipts for the U.S. Treasury in FY 2011, a significant increase compared to the $565 million of receipts generated in FY 2009.”

Apparently, bulking up the Treasury with almost $10 billion in FHA program dollars is not enough.

Who Benefits?

Raising the annual mortgage insurance premium will do little to strengthen a reserve system which is not actually in trouble. What higher premiums will do is discourage FHA financing and refinancing while driving more borrowers to the happy hands of private-sector lenders.

Most importantly, higher FHA premiums will not get to the root of the mortgage meltdown. Toxic loans created by lenders in the private sector devalued all homes. The result is that individual claims against mortgage insurance programs both public and private are larger than would otherwise be the case because homes generally have less equity. Had national lenders been properly regulated by federal authorities there simply would not have been a mortgage meltdown, falling home values or now a public love-fest with the safe and secure FHA program.

A Gift To Lenders

The Administration, says Mr. Stevens, will “ensure that the private market — not FHA — picks up that new market share.”

One way to “ensure” private lender success is to make the FHA program artificially less attractive. This is precisely what’s being done with the higher FHA premium. In effect, the government is tilting the marketplace to favor private lenders at the expense of average borrowers.

But why should the government guarantee private lenders a higher market share?

Apparently private-sector lenders can’t compete with the FHA by offering better mortgage products or lower mortgage costs. Instead, the government is picking marketplace winners by making the FHA program less competitive, less attractive and more expensive.

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