As the U.S. housing market improves, the Federal Housing Administration (FHA) plays a valuable role, helping many families achieve the dream of homeownership. The FHA is the government version of privately insured mortgages available in the conventional market, helping low down payment borrowers qualify for home financing. It’s important to preserve what’s working and reform the areas that aren’t as we continue to promote greater opportunities for all homebuyers.
Recently, Rep. Maxine Waters (D-CA) introduced legislation to repeal a borrower’s requirement to pay monthly FHA insurance for the life of the loan on mortgages originated with a down payment under 10 percent. America’s Homeowner Alliance (AHA) supports sustainable homeownership and sensibly reducing costs for homebuyers, but cautions against proposals that could put the FHA on financially unstable footing and impact the progress made in the housing market since the 2008 financial crisis. The availability and strength of the FHA over the long term is too important to risk for short term gain with policies that would erode its financial health.
History has taught us that the FHA is exposed to greater likelihood of defaults and delinquencies, and when the FHA didn’t collect enough premiums from borrowers, it couldn’t cover its losses. In 2013 the FHA needed a $1.7 billion taxpayer bailout to cover losses. There’s a careful balance to manage with the FHA between affordability and sustainability, and canceling monthly FHA premiums would equate to giving away free taxpayer-backed mortgage insurance while retaining the same risk on the government’s books. AHA can’t support this new legislation because it weakens the FHA and negatively affects the agency’s ability to be a sustainable component of the housing finance system.
What is the FHA’s life of loan requirement?
In 2013, several actions were taken to restore stability to the FHA’s Mutual Mortgage Insurance Fund (MMIF) following significant losses, including raising premiums and requiring premiums be paid for the life of the mortgage. An “Upfront” Mortgage Insurance Premium (MIP) is due at closing and is most often financed into the mortgage itself, while the “Annual” MIP is paid monthly by the borrower along with the principal and interest payment. Because a portion is almost always financed into the mortgage, the FHA’s mortgage insurance protection, which covers 100 percent of potential losses, remains in-force for the entire loan duration. Though Rep. Waters’ legislation proposes canceling the monthly payments, the government-backed insurance remains on the loan. In short, the FHA would be providing the same level of coverage while collecting less premiums to guard against the risk.
What are the unique risks inherent in the 30 Year Assumable Feature on FHA loans?
FHA-insured loans are assumable for the life of the loan while conventional insured loans are not. This means a homebuyer who finances a purchase with an FHA loan, and sells the house later when interest rates are higher, will be able to offer a potential buyer the right to assume the FHA loan that comes with a low interest rate. This is another reason why it’s logical to keep the insurance protection in place, while also requiring the homeowner – current or future – to pay premiums.
Why does the FHA have a life of loan requirement?
The U.S. Department of Housing and Urban Development instituted the FHA life of loan to improve the health of its MMIF , which fell well below its capital requirements after 2008 resulting in the government bailout. Leading up to the financial crisis, the FHA’s MMIF capital reserve was over six percent - and it still experienced losses that resulted in the agency needing government support. Today, the MMIF is just barely over two percent.
Why it isn’t the time to repeal the FHA’s life of loan requirement.
Despite the great strides the FHA has made in improving its financial health, more work needs to be done. Taxpayers are currently exposed to $1.2 trillion in outstanding FHA mortgage credit risk, and according to the FHA 2017 annual report to Congress, its MMIF stood at just 2.09 percent – down from 2.35 percent last year. This is just slightly above its statutory requirement of 2 percent. If the FHA had reduced its MIP as was proposed in January 2017, the fund would be at 1.76 percent and undercapitalized.
In addition, at the end of 2016 the delinquency rate for FHA loans jumped to more than 9 percent. Loans made in 2014, 2015, and 2016 were among those showing an increase in delinquencies. With the MMIF in such standing and rising FHA delinquency rate, it’s wise to keep current FHA safeguards in place.
Since the FHA insures 100 percent of a borrower’s loan, taxpayers are on the hook if borrowers default. The FHA’s insurance premiums are critical to protecting taxpayers and promoting homeownership.
The FHA has been instrumental in providing home loans to borrowers when many lenders in the housing finance system scaled back. Despite financial troubles, the life of loan requirement has allowed the FHA to continue insuring loans and providing millions the opportunity to become homeowners.
While the FHA is an important component of America’s mortgage finance system, there are numerous options for people to buy homes with affordable, low down payments, such as conventional loans with private mortgage insurance. Only through sensible lending and responsible housing policies can we truly encourage a prosperous and robust housing market that works for everyone. Encouraging the cancellation of FHA insurance when the MMIF is still in recovery, delinquencies at FHA are on the rise, and FHA loans are assumable by borrowers with unknown future credit characteristics for 30 years, just doesn’t meet our litmus test of “protecting and promoting sustainable homeownership for all segments of America.”