America's national housing policy seems, in a word, adrift: rudderless, following the whims of the prevailing political winds of the day, the ebb and flow of the ocean's tides, wherever they might take us.
Destination utterly unknown.
Case in point: On January 7, President Barack Obama announced that the Federal Housing Administration (FHA) will lower the mortgage insurance premium fees within the loans it guarantees by 50 basis points, from 1.35 to .85 percent. This certainly qualifies as a well-intentioned act with the obvious goal of making homeownership more affordable for qualified FHA borrowers.
Department of Housing and Urban Development (HUD) Secretary Julian Castro frequently cites the National Association of Realtors when estimating that as many as 400,000 creditworthy borrowers were priced out of homeownership in 2013 alone as a result of high mortgage insurance costs. Secretary Castro believes a 0.5 percentage point reduction in such fees could save as many as two million new FHA borrowers about $900 annually on the average $200,000 home over the next three years.
U.S. homeownership levels declined to 64 percent in 4Q 2014, according to U.S. Census Bureau data, the lowest level in two decades.
The hardest-hit Americans are undoubtedly low- to moderate-income families, would-be first-time homebuyers, and the emerging "Millennials"--18-to-35-year-old Americans constituting our single largest age demographic today. Estimates by Moody's Analytics suggest that this fee reduction could lead to as many as 45,000 additional new and existing home sales in 2015 alone, and perhaps as many as 100,000 additional home sales in 2016.
However, there are still a host of difficult and challenging questions on the road to stable homeownership that require thoughtful consideration, a few of which result from this executive action alone.
Consider the following: a 51 percent majority of the mortgage guaranty marketplace is presently controlled by Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs) currently under the conservatorship control of the Federal Housing Finance Agency (FHFA). Both organizations have seen unprecedented loan guaranty fee rate increases in recent years. The FHA is generally thought to guarantee a portfolio of mortgages that feature lower credit scores and, therefore, a higher degree of quantifiable risk than those loans purchased by either Fannie Mae or Freddie Mac. The average FICO credit score for Fannie Mae loans purchased during 3Q 2014 was 743; Freddie Mac's 3Q 2014 purchased portfolio featured an almost identical average FICO score of 744 --both well above the national average of 687.
Shouldn't Fannie Mae and Freddie Mac both reduce their loan guaranty fees accordingly? What will such an imbalance in credit quality and fees mean for the FHA? Might the American taxpayer be unintentionally forced to bear an even greater degree of risk? After all, the FHA product is fully backstopped by the taxpayer, unlike loans purchased by Fannie and Freddie, which feature a measure of private capital risk sharing. Will the FHA's share of new loan originations climb above its peak of 21 percent to even greater highs, given its more reasonable credit accessibility and lower fees? With loan limits currently pegged at $625,500 for loans originated in "high-cost areas," the FHA is poised to do more rather than less business in coming months, and its target borrowers can hardly be considered solely those of relative meager means.
What will a 40 percent reduction in FHA mortgage insurance premiums truthfully mean for the woefully underfunded Mutual Mortgage Insurance (MMI) Fund? Authorized by the National Housing Act of 1934, the MMI is designed to cover the lender in the event of an FHA borrower's default. The MMI is required by Congress to maintain capital reserves of no less than two percent of the existing FHA book of business; this level currently stands at .41 percent.
So precarious is the position of the FHA's finances from an actuarial point of view that the Government Accountability Office has added the agency to its "high risk list" of governmental entities facing significant financial difficulties.
Never mind the fact that the private sector cannot be expected to compete with an FHA product featuring low fees and no real capitalization requirement (meaning they don't have to rely solely on the strength of their own safety reserves in the way that private lenders do; they've got you for that--the taxpayer). Just as ever-increasing guaranty fees at Fannie Mae and Freddie Mac have not enticed private lenders to return to pre-housing-crisis levels of loan origination, rock-bottom fees at the FHA won't either.
It bears mentioning that the reduction of mortgage insurance premiums at FHA is widely viewed as a positive step--one that has been supported by many reputable voices in the national debate concerning the future of American homeownership. Well-respected groups representing bankers, realtors, high-profile think-tanks, and community activists alike have all offered varying degrees of support for the recent White House announcement. Problems arise when one asks the logical and inevitable question, "...What happens next?" A number of complex considerations have arisen in the wake of the FHA premium reduction announcement--to which there are no easy solutions.
The decision to reduce FHA mortgage insurance premiums in unilateral isolation from alternatively rising GSE guaranty fees should be met with deep reservations on the part of all concerned: from would-be first-time homebuyers, to current homeowners, private insurers, the White House and U.S. Congress, leaders of both major political parties, the American taxpayer, and anyone else reading this opinion. The long-term implications of this decision within the context of a broader housing marketplace that remains broken are as dubious as they are unknown.
Perhaps we should consider the following common-sense course adjustments. Decisions pertaining to the administration of FHA mortgage insurance premiums should be made in full consideration of similarly purposed policies at Fannie Mae and Freddie Mac. The three organizations currently combine for a significant majority of the residential mortgage marketplace, and all three are backstopped by the American taxpayer--Fannie Mae and Freddie Mac by way of federal conservatorship, and the FHA by way of an explicit guarantee.
Of course, this would require close coordination and collaboration between HUD, the White House, the FHFA, and perhaps the Congress--a seemingly novel idea.
Then again, perhaps the FHA could reduce loan limits from the current $625,500 "high-cost area" exception to a level more in line with its original mandate of serving well-qualified low- to moderate-income homebuyers. If a 50 basis point, taxpayer-subsidized mortgage insurance premium reduction applies only to the FHA, the ultimate economic benefit should be directed toward those homebuyers the FHA was originally intended to help.
In the ecosystem of American housing, one thing is becoming increasingly clear: reforming the way responsible Americans of all ages, creeds, colors, and income levels achieve homeownership is serious business requiring thoughtful solutions. Knee-jerk reactions done in isolation and careening from one extreme to the other simply cannot be a good thing in the long run.
A reduction in FHA mortgage insurance premiums sounds like it could be a good idea, if not one that is well-intentioned. Yet, one has to wonder, "What happens next?" As the popular saying goes, if one has no real destination in mind, any road will get you there. Ideally, this saying should not describe the strategic theme of Washington's response to the single greatest challenge confronting homeownership and America's economy in our collective lifetime.