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Praise and Concern Greet FHA Premium Change

Phil Hall
Jan 08, 2015

As President Obama spelled out his Administration’s decision to reduce the Federal Housing Administration’s (FHA) mortgage insurance premiums by 0.5 percentage points in a speech delivered today in Arizona, reaction was mostly positive among industry leaders and observers, although some expressed the need for additional changes.

“As an independent mortgage banker whose business includes a significant amount of FHA lending, I can attest that the 50 basis point reduction in FHA’s annual premium will have a significantly positive impact for my borrowers and the housing market,” said Bill Cosgrove, chairman of the Mortgage Bankers Association (MBA) and CEO of Union Home Mortgage. “Specifically, this will help first time homebuyers by making FHA loans more affordable. Given the timing, just as we begin the spring home buying season, I think today’s announcement is just what the market needs.”

“Lower premiums will make home loans more affordable for qualified borrowers, particularly first-time buyers, and help to alleviate tight credit conditions in the mortgage market,” said Kevin Kelly, chairman of the National Association of Home Builders (NAHB). “This prudent course reflects a recent actuarial report that FHA is back in black and strengthening its financial health. The new premium structure will allow FHA to continue building its reserves.”  

“Reducing FHA mortgage insurance premiums will make it easier for hundreds of thousands of home buyers to get a mortgage and provide greater access to homeownership for historically underserved groups and credit worthy families,” said California Association of Realtors (CAR) President Chris Kutzkey. “Moreover, this shift in policy will also increase the volume of borrowers using FHA-backed loans, while continuing to contribute to the solvency of FHA’s Mutual Mortgage Insurance (MMI) Fund and making the dream of homeownership a reality for millions more Americans.”

“Until now, FHA has been charging families far more for their mortgages than the cost of the risk they present to the insurance fund,” said Julia Gordon, director of housing finance and policy at the Center for American Progress. “The agency’s significant change is a bold step forward that will help hundreds of thousands of families access the safe and affordable mortgage credit they need to become successful, long-term homeowners, ultimately strengthening the housing market and the overall economic recovery.”

“We are optimistic that more affordable FHA loans will have a positive impact on first-time buyers who have been entering the market at a lower than normal rate. Over the past four years, as the fees increased, the percent share of first-time buyers using FHA-backed loans shrank from 56 percent to 39 percent,” said the National Association of Realtors (NAR) in a statement. “NAR estimates that a reduction in the annual MIP of 0.50 to 0.85 percent from the current 1.35 percent would price-in an additional 1.6 million to 2.1 million renters along with many trade-up buyers, resulting in 90,000 to 140,000 additional annual home purchases.”

“The Federal Housing Administration’s plan to reduce annual mortgage insurance premiums is a welcome step in boosting our housing market, accelerating our nation’s economic recovery, and making housing more accessible for everyone,” said Wade Henderson, president and CEO of The Leadership Conference on Civil and Human Rights. “Lowering premiums will put money back into the pockets of millions of borrowers, and will enable more creditworthy families to obtain loans.”

“We applaud President Obama for this positive step, which will be beneficial to working families striving to climb the economic ladder,” said John Taylor, president and CEO of the National Community Reinvestment Coalition. “Throughout its history, FHA has played a key role in helping working people to access homeownership and build wealth through equity. This reduction in FHA mortgage insurance premiums will serve to help make homeownership more affordable and attainable for many families. We are pleased that the administration is showing a commitment to homeownership opportunity.”

But Taylor also raised concerns that more work was needed.

“Unfortunately, the administration has not yet eliminated the requirement that most FHA borrowers pay for mortgage insurance for the life of the loan,” Taylor continued. “Typically for conventional loans, when borrowers reach a 20 percent equity threshold, they have the ability to cancel their mortgage insurance. For most FHA borrowers, this option does not exist. This unfair policy for FHA borrowers ultimately amounts to a poor tax. We call on the administration to end this recent practice. In order stimulate the housing market and ensure broad access for creditworthy borrowers it is also critically important for the FHFA to reduce excessive guarantee fees and loan level price adjustments at Fannie Mae and Freddie Mac.”

Taylor’s sentiments were shared by Gary Acosta, co-founder and CEO of the National Association of Hispanic Real Estate Professionals (NAHREP).

“Fannie Mae and Freddie Mac currently account for more than 80 percent of the market,” said Acosta. “Reducing FHA fees is an important first step, but getting the GSEs back in the first time homebuyer market would have an even greater impact.”

And a former FHA executive also signaled the need for further realignment of policy.

“I would hope that FHA and [the Office of Management and Budget] would revisit the move toward risk-based pricing, an approach that would further the objectives of this premium reduction, by creating a cost structure that would attract the appropriate mix of borrowers to balance out the overall portfolio, similar to the common practices of all other insurance companies,” said Brian Montgomery, former FHA commissioner and co-founder and vice chairman of The Collingwood Group LLC.

Not surprisingly, Republicans on Capitol Hill were not enthusiastic.

“The federal government should be winding down its involvement in the mortgage business, not engaging in a race to the bottom, and it is absolutely imperative that Congress follow through on housing finance reform this year,” said Sen. Bob Corker (R-TN).

Rep. Ed Royce (R-CA), a senior member of the House Financial Services Committee, echoed Corker with near-verbatim language.

“The President's decision reflects a race to the bottom between the FHA and the GSEs in which the private sector is crowded out and taxpayers are left holding the bag,” Rep. Royce said. “The financial crisis is proof positive that an increased government presence in housing distorts the market and promotes the very boom-and-bust cycle we are trying to avoid.”

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