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Trade groups representing mortgage lenders want the Federal Housing Administration to treat homebuyers more like private mortgage insurers, by allowing them to stop paying FHA mortgage insurance premiums once they’ve built up a 20 percent equity stake in their homes.
The FHA’s Mutual Mortgage Insurance fund has $145 billion in reserves and could withstand a downturn of the magnitude of the Great Recession of 2007-2009, the Department of Housing and Urban Development said in a report to Congress last week.
But having already slashed annual mortgage insurance premiums on new FHA loans by 35 percent in March — and with total insurance in force growing faster than reserves — HUD officials have given no indication they’re inclined to give in to long-standing industry demands to eliminate FHA “life of loan” premium requirements.
Homebuyers putting less than 20 percent down when taking out conventional loans backed by Fannie Mae and Freddie Mac are required to obtain private mortgage insurance. Once they’ve built up a 20 percent equity stake in their homes, they no longer have to pay for private mortgage insurance.
FHA’s life of loan requirement, on the other hand, means that FHA borrowers have to keep paying insurance premiums until they pay off their loan. No matter how much equity they’ve built up, the only way homeowners can get out of paying FHA premiums is to pay off their mortgage — in most cases by selling their house or refinancing into a non-FHA loan.
Valerie Saunders, president of the National Association of Mortgage Brokers (NAMB) said FHA policy should be more closely aligned with Fannie and Freddie’s.
“With homeowner equity at an all-time high, it would be extremely beneficial to future homeowners who utilize FHA financing to have the ability to remove added costs on their monthly payment as their equity grows,” Saunders said in a statement Monday. “Government leaders have the tools and information available to bring these practices to a rapid end.”
The Mortgage Bankers Association (MBA) and Community Home Lenders of America (CHLA) — a trade group representing small and mid-sized community-based mortgage lenders — issued similar statements last week.
“In light of FHA’s financial strength, just as relief from excessive student debt burdens has been a priority, the Biden administration should make relief from excessive homeownership mortgage cost burdens a priority by ending the FHA life of loan premium policy,” CHLA Executive Director Scott Olson said, in a statement.
FHA MMI fund capital ratios 2018-2023
In its annual report to Congress on the financial health of the FHA Mutual Mortgage Insurance (MMI) fund, HUD noted that the fund grew by $3.6 billion during the fiscal year ending Sept. 30, to $145.3 billion.
But with insurance in force growing by $107.6 billion to a total of $1.38 trillion, the fund’s overall capital ratio actually declined by 0.60 percentage points from a year ago, to 10.51 percent.
That’s still more than five times the minimum 2 percent capital ratio mandated by Congress. But during the last big housing downturn, the MMI fund’s capital ratio dropped below the 2 percent statutory minimum from 2009 through 2014, and the program required a $1.69 billion bailout in 2013.
Stress testing of FHA’s MMI fund 2019-2023
The steady improvement in the MMI fund’s capital ratio in recent years means the fund could withstand another downturn of the magnitude of the 2007-09 Great Recession and still maintain a capital ratio of 5.43 percent, more than double the minimum, stress tests predict.
But the fund was on even more solid footing last year when stress tests calculated that it could have maintained a capital ratio of 6.31 percent in the event of a severe downturn — more than three times the statutory minimum.
That gave HUD officials the confidence to announce a 30 basis point reduction in annual mortgage insurance premiums for most new borrowers.
Since the reduction took effect in March, FHA estimates that 425,000 borrowers have benefited and that each will save $792 a year, on average. Those savings are all the more important to the 40 percent of FHA borrowers who are considered low-income households.
“I’m proud that FHA delivered real solutions this past fiscal year, including a reduction in our mortgage insurance premiums and policy and programmatic changes that expanded access to affordable mortgage credit,” FHA head Julia Gordon said, in a statement. “Fiscal year 2023 was a difficult year for homebuyers and the professionals who serve them, and FHA’s exceptional team worked hard to support underserved borrowers and communities as well as our business partners in the mortgage and real estate sector.”
Of the 581,725 purchase mortgages FHA insured in the year ending Sept. 30, 82 percent went to first-time homebuyers. And 31 percent of FHA-backed purchase mortgages and refinancings in the last year were for borrowers of color, including Hispanic (15 percent) and Black (13 percent) homeowners.
“FHA’s move to lower mortgage insurance premiums (MIP) earlier this year improved the purchasing power for many homebuyers, but affordability challenges persist because of low housing inventory and high mortgage rates and home prices,” MBA CEO Bob Broeksmit said in a statement. “Further action on the MIP, such as eliminating the life of loan premium requirement, should be considered to provide payment relief to FHA borrowers.”
Serious delinquency rate back to pre-pandemic levels
After surging to 11.9 percent during the first year of the pandemic, the serious delinquency rate on the FHA’s portfolio of 7.5 million mortgages has dropped to 3.93 percent, as borrowers who sought forbearance get back on track with their payments.
All told, about 2.4 million FHA borrowers sought forbearance or became seriously delinquent from April 1, 2020, through September 30, 2023. Close to half of those borrowers — 1.1 million — remain in their homes as a result of loss mitigation options that typically involve deferring past-due payments, interest-free, to the end of the loan term. Another 772,000 borrowers got caught up or have paid off their mortgage without needing a loss mitigation plan, FHA said in its report to Congress.
While those efforts helped bring the serious delinquency rate back down to Earth, HUD’s Office of Inspector General (OIG) issued its own report last week that highlighted challenges FHA could face in the event of another serious shock to the economy.
The report, a broad look at the most serious management challenges facing HUD, summarized ongoing difficulties overseeing FHA loan servicers that are supposed to provide loss mitigation options to borrowers. In addition, when borrowers can’t be helped, HUD faces “a lengthy foreclosure and conveyance process, which negatively impacts the Mutual Mortgage Insurance Fund,” the report said.
In an audit published in June, HUD OIG concluded that FHA loan servicers did not provide the proper loss mitigation assistance to 67 percent of delinquent borrowers after their COVID-19 forbearance ended.
Close to half (43.6 percent) of borrowers either did not receive the loss mitigation option for which they were eligible, had their option not calculated properly, or received an option that did not reinstate arrearages. While some servicers provided borrowers with the correct loss mitigation option, they did not follow HUD’s guidance to help 28 percent of borrowers with payments that were missed during forbearance, HUD OIG found.
“FHA can take several actions to improve its oversight of servicers who provide loss mitigation, the most important of which are to engage with servicers to determine the reasons for noncompliance and address common loss mitigation issues and to design and implement a data-driven methodology to determine the appropriate mix of oversight it provides over origination and servicing to account for market changes like those that occurred during the pandemic,” HUD OIG concluded.
Ginnie Mae’s ‘fourth loss position’
Another ongoing concern of HUD OIG is the risk posed by the rise of nonbank lenders like United Wholesale Mortgage and Rocket Companies to Ginnie Mae, a government-owned corporation within HUD that plays a crucial role in bundling FHA, VA and USDA mortgages into mortgage-backed securities (MBS).
Ginnie Mae maintains that because it guarantees the servicing performance of the MBS issuers, not the underlying collateral, it’s insulated from the credit risk posed by the mortgages themselves. In a downturn, homeowners take the first hit as price declines erase equity they’ve built in their home. If homeowners can’t keep up with their payments, FHA, VA and USDA government insurance programs help limit the losses of MBS issuers and servicers.
Ginnie Mae “is in the fourth loss position and is at risk only when all three of the preceding layers of risk protection are exhausted or fail” and has never needed a bailout from the federal government, the company says of its business model.
HUD OIG’s concern is that a small number of nonbank lenders have become the dominant lender counterparty participating in FHA-insured loans and issuing Ginnie Mae MBS. When times get tough and more homeowners default, the worry is that nonbank MBS issuers will be at greater risk of defaulting on payments to MBS investors, which would leave Ginnie Mae on the hook.
Recognizing the risks posed by the concentration of Ginnie Mae securities and mortgage servicing rights in a small number of nonbank issuers, the company in 2022 announced plans to implement stricter net worth and liquidity levels for nonbank issuers, who will also be required to maintain risk-based capital ratios.
“We remain concerned that the current economic environment is one that Ginnie Mae has not faced, with a significant concentration of nonbank issuers in its program,” HUD OIG noted in its report last week. “In response to soaring inflation, interest rates have rapidly increased since early 2022 and have sustained higher levels than expected. This condition places significant pressure on nonbanks and heightens the risk that they may not be able to maintain the liquidity required to operate in Ginnie Mae’s program.”
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