WASHINGTON — Almost six months after the newly inaugurated Trump administration tabled a Federal Housing Administration premium cut, industry backers have maintained hope it will be revived, especially as the FHA portfolio continues to recover. But a key obstacle remains: There's no one to run the mortgage insurance agency.
The latest data shows the FHA insurance fund continues to strengthen, with serious delinquencies down 50% since 2012. Ben Carson, secretary of the Department of Housing and Urban Development, had promised a full review of the Obama administration's proposed 25-basis-point price cut, setting the stage possibly for the policy to be resumed.
But even former Obama officials say the appointment of an FHA commissioner is necessary before any decision is made. While no nominee has been named, Brian Montgomery — who had held the FHA job in the George W. Bush administration — is reportedly under consideration.
"While it certainly appears as if FHA could lower its premiums based on the current risk in the portfolio, there are also other considerations and I would think it wise to have the new FHA commissioner in place to provide further insight and recommendations," Carol Galante, a former FHA commissioner in the Obama administration, said in a written response.
The agency's most recent quarterly report to Congress shows the performance of the FHA mortgage portfolio has improved in line with the recovery in home prices. The FHA serious delinquency rate (90 days or more past due) fell to 4.54% as of March 31, down from 5.31% a year ago.
In 2012, as the housing market started to recover, the FHA had a 9.4% serious delinquency rate and just $32.3 billion to cover claims from defaults and foreclosures. The FHA's capital ratio was in negative territory following the housing bust. By statute, the FHA is required to maintain a 2% minimum capital ratio. It returned to a positive ratio in fiscal year 2014 and reached 2.32% in FY 2016.
"FHA's strong book of business and their ability to maintain a 2% capital reserve ratio both indicate that it's time to cut the mortgage insurance premium," said National Association of Realtors President William Brown.
But HUD will likely hold off making a decision before the FHA job is filled. During his June 8 confirmation hearing, Carson told senators that he wants to wait for the new FHA commissioner to be in place before deciding how to proceed. "We are looking forward to new leadership at FHA," Carson said.
Experts have generally lauded that approach.
It is "prudent for the new federal housing commissioner to weigh in before any reduction is implemented," said Nicolas Retsinas, a former FHA commissioner in the Clinton administration.
The Obama administration was prepared to reduce the FHA annual premium by 25 basis points to 60 basis points after the presidential election. In early January, former HUD Secretary Julian Castro announced that the price cut would take effect later that month. But just moments after President Trump took office, the new administration announced that the reduction would be suspended.
Since the housing crisis, the FHA mortgage insurance fund has beefed up its reserves and accumulated $50.5 billion to pay off any claims due to defaults and foreclosures, up from $45.5 billion in the second quarter of 2016 ending March 31, according to the FHA's latest quarterly report to Congress, dated June 23.
"If every seriously delinquent loan ended up in foreclosure and FHA recovered $0 [on each loan], FHA would still have $3 billion" in its reserve account, said Brian Chappelle, a partner at Potomac Partners.
Since all serious delinquencies do not result in foreclosure and the FHA recovers over 50% on the sale of foreclosed properties, Chappelle estimates the FHA's reserves are more than adequate to deal with another housing crisis.
Even though the Trump administration suspended the price reduction, industry representatives have been encouraged by Carson's pledge to review the policy, signaling that HUD will not just abandon the proposal without consideration.
"We are confident the secretary will follow through on his promise," said Glen Corso, executive director of the Community Mortgage Lenders of America. "CMLA believes that based on the strong credit performance of the FHA's single-family loans that HUD will conclude that the 25-basis-point reduction to the annual premium is both prudent and appropriate," Corso said.
But some are concerned that an FHA premium reduction, combined with the limited supply of entry-level housing, will only fuel more demand and push housing prices higher.
Edward Pinto, a resident scholar at the American Enterprise Institute and co-director of AEI's International Housing Risk Center, noted that house prices have been rising for 60 straight months and they continue to go up at an accelerating rate. The Federal Housing Finance Agency recently reported that prices rose 6.8% year over year.
"We are eight years into an economic expansion," Pinto said, and five years into a house-price boom, which the "FHA has been promoting with loose lending."
The FHA is a major player in one of the hottest California markets — the Riverside-San Bernardino metropolitan statistical area.
"When you lower mortgage insurance premiums or increase debt-to-income ratios or lower FICO scores into a seller's market, house prices tend to go up," Pinto said.
House prices in Riverside-San Bernardino are up 23% year-over-year and the FHA is providing 47% of the financing. "The Obama administration warned that a 2% capital level is not appropriate once you get well into an economic expansion. It is really a minimum," Pinto said.
However, Chappelle said he expects that the FHA insurance fund will just keep on getting stronger. "It could reach a 4% capital ratio by the end of the 2017 fiscal year," Sept. 30, he said.
In addition to reducing the annual FHA premium, several industry groups — including the Mortgage Bankers Association, Community Home Lenders Association and the Realtors — want the agency to adjust or eliminate the "life of loan" policy.
"We will continue to make the case for a cut as well as other outstanding issues, like eliminating the 'life of loan' mortgage insurance requirement, when the next FHA commissioner is chosen,” Brown said.
The FHA charges single-family borrowers a one-time 1.75% upfront fee and an 85-basis-point annual fee. The FHA announced in January 2013 that it would require borrowers to pay the annual premium over the life of the loan to replenish the FHA insurance fund. Previously, it stopped collecting annual premiums once the borrower reached a 78% loan-to-value ratio.
The Community Home Lenders Association also wants the FHA to end the "life of loan" policy and lower the annual premium.
"We would actually like to reduce the annual premium by 30 basis points down to 55 basis points, which is more effective in making the buyer's payments more affordable," said Scott Olson, executive director of the Community Home Lenders Association. "We are also asking to undo the 'life of loan' premium that the Obama administration implemented," he added.
Yet industry representatives stressed that a premium reduction is needed because credit is still tight and the homeownership rate is at a 50-year low.
"The MBA looks forward to working with the new commissioner to ensure that both the level and the structure of the premium are set to balance the interests of consumers and the taxpayers," MBA Senior Vice President Pete Mills said.