The FHA has a problem: It’s successful. Too successful. Indeed, it’s so successful that some in the mortgage industry say it’s just plain unfair for the FHA to “lower” annual mortgage insurance rates, even though such cheaper rates are likely to entice some 250,000 new homebuyers into the market this year.
“The outsized role the government plays in housing continues to be a primary bipartisan concern, and lowering FHA premiums will exacerbate the problem,” says the American Action Forum. “The effort will likely preserve or even expand FHA’s market share by making its mortgage insurance cheaper for prospective borrowers than what is offered by private companies.”
There is, of course, a ready solution to this alleged “problem.” Private mortgage insurance companies might offer better products, cheaper rates or both. That sure sounds like the way market share should be won in a capitalist economy….
FHA: Pro-Lender Program
The lending industry can reduce FHA market share any time it likes. The problem is not that FHA annual insurance premiums were dropped by .5 percent in January, a big savings for borrowers, it’s that the FHA is not only a pro-borrower program it’s also pro lender. It’s the second part that private mortgage insurance industry forgets about.
The FHA is an insurance program. It makes no loans, lenders are not required to offer FHA-backed financing, and if lenders do not like the FHA they can simply elect to get mortgage insurance from other sources or refuse to offer insured loans at all.
The problem with the dump-FHA approach is that lenders don’t want to drop it. Indeed, a lender with any brains wants even lower FHA premiums.
To understand why let’s follow the money. If the FHA reduces mortgage insurance premiums does it encourage or discourage the origination of more loans? Savvy readers will catch on instantly, the answer is more loans. And who gets more fees, more income and more benefits when additional loans are originated? That would be lenders.
The last thing lenders want at this moment is less loan volume. With rates at or below 4 percent for much of the past three years there’s not much interest in refinancing.
“Most eligible borrowers,” said the Mortgage Bankers Association, “have already refinanced into lower rates and it has been estimated that about 80 percent of loans outstanding have a mortgage rate of 4.5 percent and lower. Within the remaining 20 percent, it is likely that many are still underwater, owing more than their homes are worth, or do not have the income or credit to refinance.”
With the refinancing market largely stuck the big opportunities should be with purchase money mortgages, financing for new homes. But — unfortunately — that’s also a troubled market sector, especially since existing home sales in 2014 were 3.1 percent lower than in 2013.
Given low rates, automation and fewer players in the market it should be that lender profits have increased but that isn’t the case. According to Inside Mortgage Finance, 31 major mortgage lenders earned $14 billion in 2014, a drop of almost 40 percent from 2013.
Not only do lower FHA insurance premiums elate lenders, there’s also another matter which delights them: The FHA will make good on loans that fail. As Rohit Gupta, the President and CEO of Genworth Mortgage Insurance as well as chairman of the Washington-based U.S. Mortgage Insurers, told Congress in February, “FHA insurance essentially covers 100 percent of losses in the event a borrower defaults, and the insurance coverage remains in place for the life of the loan.”
In other words, while FHA borrowers must risk at least 3.5 percent of the purchase price when purchasing a home — the required down payment — lenders with loans backed by the FHA have “essentially” no risk; they get 100 percent protection if a borrower is foreclosed.
Given 100-percent risk protection, the miracle is not that lenders make so many FHA loans, the miracle is that they don’t make more of them.
When the FHA announced its premium reduction, USMI said that “while progress was made in restoring the financial health of the fund, it fell well short of its 2 percent capital ratio mandate. In light of that report, USMI urged policy makers to proceed cautiously and to carefully assess the impact of any potential FHA premium reductions on its solvency as well as its stated objective of returning the FHA to a smaller and more traditional share of the mortgage market.”
But why should “policy makers” — code for politicians — artificially reduce the size of the FHA?
When the mortgage market was booming — fueled in large measure with the toxic loans which became the feedstock for the mortgage meltdown — the FHA could barely compete in the marketplace.
But then — when everything blew up and the private sector required a $1.7 trillion bailout — it was the FHA which was ready, willing and able to insure residential mortgages. Curiously, not one lender complained about FHA market share issues at the time.
The effort to reduce FHA insurance activity should be left to the marketplace but that’s not going to happen. For instance, the White House said in 2013 that with the current system “where the government guarantees more than 80 percent of all mortgages through Fannie Mae and Freddie Mac and FHA, is unsustainable. A reformed system must have a limited government role, encourage a return of private capital, and put the risk and rewards associated with mortgage lending in the hands of private actors, not the taxpayers.”
The catch is that it wasn’t the FHA, Fannie Mae or Freddie Mac that got the lion’s share of that $1.7 trillion bailout money, it was the private sector.
One way to change or reduce the FHA’s market share is to assure that it fewer products to offer. Just take a look at the last-minute budget bill passed in December. It says “none of the funds made available by this Act nor any receipts or amounts collected under any Federal Housing Administration program may be used to implement the Homeowners Armed with Knowledge (HAWK) program.”
And what was the HAWK program? An FHA effort scheduled to start this year that would have saved first-time homeowners almost $10,000 in insurance premiums over the life of the loan in exchange for a good payment history and attendance at consumer education classes.
With such savings would the HAWK program have brought more buyers into the marketplace? Would it have increased real estate demand and perhaps home prices? Would it have created more sale opportunities for brokers, more loan activity for lenders and more tax revenues for local governments?
Never mind. If an open marketplace doesn’t work we can just “reform” the system by changing it from Washington.