As readers of this blog likely know, MBA has been laser-focused on issues of housing affordability for years. This attention has only grown more urgent in the face of rapidly rising interest rates, inflation at 40-year highs, and home-price growth continuing to outpace wage growth. These concerns are particularly important to low- to moderate-income borrowers, who predominantly are served by FHA-insured loans. To help make FHA loans more affordable, MBA continues to support a reduction in the FHA Mortgage Insurance Premium (MIP) set by HUD.
The MIP is the fee paid by borrowers for the insurance to protect FHA should a borrower default on a loan. The MIP contains two components – a 1.75 percent upfront charge paid at closing (and usually financed in the loan amount) and, for most borrowers, a 0.85 percent annual charge that is collected as part of the monthly payment for the life of the loan. This pricing structure has been unchanged since 2015.
Despite the challenges associated with the COVID-19 pandemic, the past few years have seen FHA develop a much larger financial “cushion” in its insurance fund. This robust improvement is due to a strong housing market, careful underwriting by lenders, decisive actions by government and industry actors to help borrowers remain in their homes, and prudent risk management by HUD leadership across political parties and administrations. Last November, in response to FHA’s latest annual report to Congress on the health of its insurance fund, I remarked that, “With the combined Fund capital ratio now at 8.03 percent, it is appropriate for HUD to expeditiously examine reductions in FHA mortgage insurance premiums, which have been at their current levels for nearly seven years.”
At that time, I noted that with several hundred thousand FHA borrowers still in forbearance, it was prudent for HUD to carefully monitor and assess how successfully those borrowers were exiting forbearance. That data is now in.
According to MBA’s Forbearance and Call Volume Survey, FHA borrowers continue to exit forbearance, and the share of loans in Ginnie Mae-backed securities (which includes FHA loans) that remain in forbearance through February stands at 1.50 percent, down from nearly 12 percent in May 2020. Moreover, the vast majority – more than 80 percent – of the borrowers who exited forbearance are paying their loans on time.
Clearly, the residual risks to the Fund from the pandemic are subsiding. Simply put, when an insurance fund has resources well above what it expects to pay out in future claims, it has room to lower its premiums. A lower MIP would translate directly into lower monthly mortgage payments for FHA borrowers, helping to counterbalance affordability challenges resulting from rising home prices and interest rates. I felt then, as I do now, that HUD should focus on pricing changes that have the greatest impact on affordability and sustainability for borrowers, such as reductions to the annual premiums. This is a point I have raised publicly and privately with HUD leadership on several occasions.
In addition to steadily declining forbearance usage, the same staggering home-price growth that presents challenges for first-time homebuyers has created substantial home equity for existing borrowers – including FHA borrowers. This means that even for those borrowers who do default, the likelihood of losses for FHA’s insurance fund is diminished.
All told, the picture points to a healthy financial position for FHA, giving HUD the capacity to lower the MIP at a time when it’s most needed. A hot job market and strong wage growthare driving housing demand, but purchase activity is muted because of high rates and low inventory. Against this backdrop, qualified borrowers should not be charged higher premiums than necessary.
The good news is that we believe HUD (and the Biden administration more broadly) agrees. This should result not only in much-needed reductions to the FHA MIP, but also targeted recalibration of the fees charged by Fannie Mae and Freddie Mac, which are being reviewed by FHFA as we speak. Together, reductions in FHA and GSE pricing have the potential to help more borrowers achieve homeownership in a market in which affordability remains strained for so many. Here at MBA, we’ll continue to advocate forcefully for affordable homeownership throughout the country.