There’s been a lot of reporting on FHA mortgages lately, creating some confusion. Of course I’m referring to the controversy surrounding FHA’s annual mortgage insurance premium (also known as MIP). Many were surprised to hear that one of the outgoing directives of the Obama administration was to lower the FHA MIP. And, eleven days later, many were just as surprised to hear that the new Trump administration reversed that directive. So what are the FHA Mortgage Insurance Premium Facts?
FHA Mortgage Insurance Premium Facts
Mortgagee Letter 2017-01, dated January 9, 2017 described revisions to the annual MIP for “certain” FHA loans. The effective date of the revisions was to be January 27th. Meaning, that FHA mortgages that closed and/or disbursed on or after January 27th would have had the lower MIP. Although the general reporting was that borrowers would save an average of $500 per year (an average of about $41 per month), the actual savings would have depended on the amount borrowed, term of loan and loan-to-value (percentage of loan amount to home value).
Additionally, the lower MIP would have been on new loans that were to have been disbursed (closed) on or after January 27th. Contrary to some reporting (and more reporting and more reporting) and social media postings, existing FHA loans would not have benefited from the lowered the MIP. Also, the reduction was suspended before the effective date, so MIP did not increase for new mortgages.
The rational stated in Mortgagee Letter 2017-01 (Purpose and Background sections) for the lower MIP was that FHA has met the obligation to its Mutual Mortgage Insurance Fund (MMIF). The MMIF covers lender losses on FHA mortgages. Historically, HUD has adjusted the MIP (by increasing or decreasing MIP) as needed to meet the MMIF mandated requirements. HUD’s last FHA MIP reduction occurred in 2015. The November 15, 2016 Federal Housing Administration Annual Report to Congress reported that the MMIF increased from the previous year and the Fund’s capital ratio was 2.32 percent (above the 2 percent minimum capital reserve requirement). The Report did not signal any impending reduction to the MIP this year.
Some have pointed to budget juggling and over projecting to make the MMIF appear solvent. Consider that the MMIF pre-crisis reserve ratio was well above the minimum 2 percent but needed about $1.7 billion to replenish reserves after the crisis. When the FHA MIP was reduced in 2015, many testified to congress about the potential risks. Douglas Holtz-Eakin, President of the American Action Forum provided such testimony February 26, 2015 to the United States House of Representatives Committee on Financial Services Subcommittee on Housing and Insurance “The Future of Housing in America: Oversight of the Federal Housing Administration, Part II.” Holtz-Eakin provided data stating:
Adding to concern surrounding premium reductions, FHA’s recent history has been plagued by missed projections. These missed projections enhance the perception that FHA downplays risks borne by taxpayers and cast doubt on the assumption that FHA will continually improve as projected despite cutting annual premiums. Since FY 2009, FHA’s capital ratio has been below the 2 percent minimum mandated by Congress. FHA has repeatedly projected marked improvement only to miss its targets…In every actuarial review since 2003, the economic value of FHA’s MMIF has come in lower than what was projected the previous year …While FHA has in the past pointed to programs like home equity conversion mortgages (HECM) or the prevalence of seller-funded down payment assistance for losses greater than anticipated, erroneous economic assumptions and volume forecasts are more frequently to blame.Following the dramatic fall in FHA’s economic value shown in Table 1, legislative attempts to reform FHA in the last Congress would have raised its mandated capital ratio even higher. Reform proposals have included a new capital ratio of either 3 percent or 4 percent, levels FHA’s MMIF is not expected to reach until 2018 and 2019 respectively before factoring in the effects of premium reductions. FHA’s capital buffer is meant to protect taxpayers in an economic downturn while preserving FHA’s ability to fulfill its mission; its restoration is critical. Furthermore, many rightly worry that FHA’s current economic value is overstated due to the influx of money from major mortgage‐related legal settlements and the one-time appropriation of $1.7 billion from the Treasury Department ..
An example of budgetary juggling is hinted by HUD Secretary Julián Castro in his July 13, 2016 oral testimony to the U.S. House Committee on Financial Services Hearing on “HUD Accountability.” In his statement earlier this year, he attributed the health of FHA’s MMIF to HUD’s Distressed Asset Stabilization Program (The DASP was put into place to help troubled home owners who were at risk of default, as well as dealing with delinquent and defaulted mortgages):
“…And when you consider that DASP has contributed more than $2 billion to the MMI Fund above what would’ve otherwise been collected, it’s clear this innovative program is a significant reason why the Fund’s capital reserve ratio is now above its 2 percent requirement.”
Of course, changes to DASP would most likely reduce contributions to the MMIF. A HUD press release outlines those changes (FHA Announces Most Significant Improvements to Date for Distressed Notes Sales Program; June 30, 2016):
In addition, FHA’s latest enhancements prohibit investors from abandoning low-value properties in high-foreclosure neighborhoods to prevent blight. FHA is also offering greater opportunity for non-profit organizations, local governments and other governmental entities to participate in DASP. Loans are not eligible to be sold through DASP unless and until all FHA loss mitigation efforts are exhausted. On average, mortgages sold through this sales program are 29 months delinquent at the time of the auction.
FHA is supposed to be self-funded through its MMIF. Suspending the MIP reduction may be to assure the longevity of FHA to future home buyers. In suspending the MIP reduction, Mortgagee Letter 2017-07 stated (Background section): “FHA is committed to ensuring its mortgage insurance programs remains viable and effective in the long term for all parties involved, especially our taxpayers. As such, more analysis and research are deemed necessary to assess future adjustments while also considering potential market conditions …”
Copyright © Dan Krell
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