WASHINGTON — The Federal Housing Administration will continue to charge borrowers an annual premium over the entire life of the loan, rejecting calls from some housing advocates to change how it’s calculated.
"I am not actually considering a change to the life of loan policy," Edward Golding, the deputy principal assistant secretary for the FHA, said at a House Financial Services subcommittee hearing on the health of the agency’s mortgage insurance fund.
The Community Home Lenders Association has been pushing for the FHA to drop the requirement, arguing it isn’t fair a charge the fee after the loan-to-value ratio hits 78%.
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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.
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In one corner are groups like the Community Home Lenders Association and the major credit union groups, which are hoping the administration will further cut premiums after a reduction a year ago. In the other are the MBA and the ICBA, which argue a cut now would be too soon.
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By the time the LTV hits 78%, the borrower has already paid upfront and annual premiums that equal nearly 10% of the loan amount, according to Scott Olson, executive director of the home lender association.
"At a certain point, you have paid so much in fees that we don't think it is fair," Olson in an interview Thursday.
But Golding told the subcommittee members that FHA defaults “occur a lot longer after origination than people expect.”
He noted that the guarantee fees Fannie Mae and Freddie Mac charge are for the life of the loan.
Before the FHA ran into financial troubles due to the housing turndown and rising loan defaults, the annual premium was terminated when the loan-to-value ratio hit 78%.
The FHA reduced its 1.35-basis-point annual premium to 85 basis points in January 2014, which led to an increase in loan production and helped the agency’s fund reach its statutory minimum capital ratio of 2% in September 2015.
During the hearing, Reps. Andy Barr, R-Ky., and Scott Garrett, R-N.J., said Congress should raise the minimum capital requirement to 4% to deal with next economic recession.
But Golding said he believed “the 2% standard is a good standard,” even though “we are building reserves above 2%.”
He resisted Garrett's suggestions that the FHA adopt a higher capital standard or stress testing similar to what is required of the banks.
But the FHA chief agreed to work with Garrett on determining the amount of capital that would be needed to survive another great recession. "That would be fantastic," Garrett said.
