WASHINGTON The recent drop in interest rates has opened the door for lenders to refinance borrowers out of high-cost Federal Housing Administration loans and that could spell trouble for the agency's mortgage insurance fund.
Homebuyers in current FHA loans with some appreciation on top of their 3.5% downpayment and good credit scores could now be eligible to refinance into conventional Fannie Mae and Freddie Mac loans with lender-placed insurance, lenders said.
"This is a good opportunity to refinance some of your clients who did FHA purchase mortgages last year at 4.25%," according to Richard Bettencourt, a branch manager at Mortgage Network in Danvers, Mass.
He said the borrower can get rid of the annual premium that FHA charges over the life of the loan, which could equal significant savings for borrowers.
But if this refinancing wave has legs, FHA could experience a significant reduction in annual premium payments that are being used to recapitalize the FHA mortgage insurance fund.
"The runoff of quality loans coupled with the decline in originations is the immediate threat to the solvency of the FHA fund going forward," said Brian Chappelle, a mortgage consultant based in Washington.
FHA will face stiffer competition from Fannie and Freddie next year when they introduce new low downpayment loans. The two government-sponsored enterprises currently offer mortgage products with 5% downpayments.
Early next year, the GSEs will be introducing 3% downpayment loans while the minimum downpayment on an FHA-insured loan remains 3.5%.
Timothy Mayopoulos, the president and chief executive of Fannie Mae, discussed the new 97% loan-to-value products at the Mortgage Bankers Association annual conference on Monday.
"It will also be competitively priced, including against FHA execution. We want this business," Mayopoulos said. "I encourage you to stay tuned to learn more about our 97% LTV product, which we expect will help you serve more borrowers."
FHA cannot afford to lose much income. It raised its premiums because its fund, which is required to maintain a 2% capital ratio, was wiped out in the wake of the financial crisis. It stood at -0.11% at the end of fiscal year 2013.
The fund is expected to show improvement this year when the fiscal 2014 FHA actuarial report is released in November, but still fall short of its statutory minimum.
At the same time, lenders are concerned FHA will see its best loans run off if agency officials don't lower the annual premium.
"Lowering the upfront premium is not enough to protect the FHA fund from being adversely selected," Chappelle said.
Future acting FHA Commissioner Biniam Gebreis said during the MBA conference that the FHA will revisit its premium structure in the next few months. FHA currently charges a 175-basis point upfront fee and an annual 135 basis point annual fee. (Gebreis will become acting FHA head when current commissioner Carol Galante steps down, which is expected soon.)
Jaret Seiberg, an analyst for the Guggenheim Washington Research Group, expects FHA official to reduce the upfront premium first.
"Then it will move onto the annual fee," Seiberg says in a report issued Tuesday.
Meanwhile, loan officers are contacting their best clients who are paying the annual 1.35% FHA mortgage insurance premium to see if they want to refinance. On a $200,000 FHA loan, the borrower could save $225 a month by eliminating the annual premium.
Borrowers may take a slightly higher interest due to the lender-placed insurance but they could still walk away with substantial savings, according to Richard Green, president of Presidential Bank Mortgage, Bethesda, MD, which is a subsidiary of Presidential Bank FSB.
"I locked down a couple" of refinancings on Tuesday, Green said, at a 4.25% and 4 3/8% rate.