It’s been a banner year for the FHA, one that has surely confounded program critics.
Back in December 2014, Edward J. Pinto, codirector of American Enterprise Institute’s International Center on Housing Risk, “said he does not expect the Federal Housing Administration (FHA) to reduce mortgage insurance premiums in 2015, perhaps not until 2017,” according to the Scotsmans Guide.
And then, a few weeks later, in January 2015, HUD reduced the FHA’s annual mortgage insurance premium by a full half percent, a huge drop, predicting that the lower premium would save “FHA homeowners an average of $900 annually and spur 250,000 new homebuyers to purchase their first home over the next three years.”
No matter. Writing in The Wall Street Journal in late January 2015 Pinto said that “earlier this month, President Obama announced that the Federal Housing Administration (FHA) will begin lowering annual mortgage-insurance premiums ‘to make mortgages more affordable and accessible.’ While that sounds good in the abstract, the decision is a bad one with serious consequences for the housing market.”
It’s fair to now ask what has happened with the FHA since the premium cut. Did loans become more accessible? Did FHA mortgage rates rise? Did more people get FHA financing? Was Pinto right or wrong?
We now have the answer. HUD has just released it’s fiscal 2015 FHA report to Congress and the numbers are stunning.
FHA Mortgage Premiums
FHA mortgages are attractive to many borrowers in large measure because they allow individuals to buy real estate with just 3.5 percent down. In exchange for the low down payment, borrowers are required to pay mortgage insurance costs which comes in two forms: first, there is an upfront mortgage insurance premium (UFMIP) which is equal to 1.75 percent of the mortgage amount. Second, there is an annual mortgage insurance premium (annual MIP) and that one, until the start of 2015, was equal to 1.35 percent for most FHA borrowers. At the beginning of 2015, HUD lowered the annual MIP to .85 percent.
The reduced annual mortgage insurance premium means big savings for new FHA borrowers. For instance, in rough terms in the first year of a $150,000 mortgage the mortgage insurance premium at 1.35 percent would cost the borrower $2,025. Lower the premium to .85 percent and the annual cost is reduced to $1,275.
FHA Mortgage Endorsements Soar
The public obviously saw the value of the new FHA insurance pricing plan. According to HUD’s report to Congress, the FHA endorsed 786,355 mortgages in fiscal 2014, a figure which rose to 1,116,232 endorsements in fiscal 2015, an increase of 329,877 loans.
At the same time, the FHA added $19 billion to its reserve fund, an amount which meant the reserve is now equal to more than 2 percent of the loans insured by the FHA and a percentage mandated by the Congress. In fact, the FHA is doing so well that there are now calls for a second round of premium reductions, especially since FHA mortgage rates have remained largely below 4 percent. According to the Community Home Lenders Association (CHLA), the FHA should cut annual premiums back down to the pre-crisis level of .55 percent.
Are further premium cuts in the works? Given the FHA’s 2015 performance, one can argue that lower insurance costs for FHA borrowers are surely justified. Time will tell whether HUD will favor such cuts, meanwhile the marketplace has plainly spoken.
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