FHA Reluctant to Further Cut Premiums, Despite Boost to Fund

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WASHINGTON — The Federal Housing Administration's unexpected windfall is already generating industry talk about another premium cut by the agency — but FHA officials insist such discussion is premature.

The agency announced Monday that the mutual mortgage insurance fund's ratio of reserves to guaranteed loans had skyrocketed to 2.07%, marking the first time since the financial crisis it was above its statutory minimum. The dramatic reversal from a year earlier, when the fund's ratio was just 0.4%, was helped by a premium cut in February.

But FHA officials downplayed the chances of another cut.

"At this point, we don't have any plans to change" the mortgage insurance premium structure, FHA Deputy Principal Assistant Secretary Edward Golding said during a briefing with reporters on Monday morning.

The fund had been expected to reach 1.3% as of Sept. 30, based on analysis by actuarial auditors last year. But the FHA cut its annual insurance premium by 50 basis points to 85 basis points in February, which helped swell FHA's loan volume and revenues.

As of Sept. 30, the reserve fund jumped to $23.8 billion in the 2015 fiscal year, up sharply from $4.8 billion a year earlier.

Department of Housing and Urban Development Secretary Julian Castro cited the drop in premiums as a key reason behind the FHA's change in fortune.

"It's an incredible comeback story," Castro said. "Today the housing market is getting stronger, optimism is rising and opportunity is expanding."

The rebound is particularly good news for Castro because he came under intense criticism from Republican lawmakers for enacting the earlier premium cut before the fund reached its statutory 2% minimum.

Fear of a political backlash may mean the FHA takes its time before cutting premiums again, but community groups have already laid the groundwork for another move by the agency.

"If FHA exceeds a 2% capital ratio, CHLA believes FHA should cut annual premiums back to the pre-crisis level of 0.55%," Scott Olson, the executive director of the Community Home Lenders Association, said in an Oct. 28 letter to Golding.

The group is also pushing for the FHA to end the life of the loan requirement, which requires borrowers to pay the annual premium for the entire term. The annual premium used to terminate when the loan-to-value ratio hit 78%.

"We think we can go further on premiums and life of loan is still a problem," Olson said in an interview Monday.

Jim Parrott, a senior fellow at the Urban Institute and former White House adviser, said he does not expect the FHA to give in to industry demands in the near future.

"I am not sure we will see FHA move on the premium front anytime soon. I think they feel comfortable they are in a good place price wise," he said in an interview. "My hope is they will focus on the credit overlay problem."

Parrott said the FHA could endorse many more loans if lenders worked better inside the FHA's credit box. The agency allows a 580 credit score, but many lenders won't lend to anyone with less than a 640.

The agency could have a sizable impact if it provides more clarity on how its handles mistakes on loan underwriting, Parrott said. The agency's proposed loan certification rule, which has raised objections from lenders, will be critical in providing that clarity.

"They can be more impactful if they can expand the universe of people that can get FHA loans rather than making it less expensive for those who can already get an FHA loan," he said.

Ed Mills, an analyst for FBR Capital Markets, agreed that the FHA is unlikely to budge on premiums.

"The FHA appears poised to continue its push down the FICO spectrum," he said in a report Monday.

There are separate questions, meanwhile, about whether the FHA single-family forward mortgage program and reverse mortgage program should be subject to separate capital standards.

The reverse mortgage program is significantly more volatile than the single-family one.

The reverse mortgage program "improved by $8 billion from last year," Golding said. But "the HECM portfolio does exhibit significant swings year over year."

The Mortgage Bankers Association noted that the HECM program has an overweighted impact on the FHA fund.

"While only 10% of the overall portfolio, the HECM program has been responsible for a large part of the value swing in recent years, which is something that policymakers might want to be looking at," said David Stevens, the MBA's president and chief executive. "That, however, does not diminish what is really good news today, that the capital reserves are now forecast to exceed the 2% statutory minimum."

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