While the Federal Housing Administration again appears well capitalized to pay future claims, mortgage lenders say it’s time to think about lowering FHA mortgage insurance premiums to help make homes more affordable.
But in an annual financial report to Congress, FHA officials warn that the FHA mutual mortgage insurance fund also appeared to be well capitalized before the real estate crisis and recession of 2007-09, and that its finances could again be put to the test if the current real estate boom wears off.
While the FHA funded a record $ 176 billion in loans for first-time homebuyers in the year ending September 30, it is also trying to help more than 660,000 seriously delinquent borrowers. over $ 110 billion in loans to avoid foreclosure.
In a preface to the report, US Housing Secretary Marcia Fudge said she was “encouraged” to see the Mutual Mortgage Insurance (MMI) fund “remain strong and resilient through the many events of the past year” , but said the FHA “will continue to closely monitor delinquencies that remain in the portfolio” to ensure the fund remains solvent.
FHA Mutual Mortgage Insurance Fund capital ratios
Over the past year, the capital of the MMI fund has increased by $ 21.5 billion to reach $ 100.5 billion. As of September 30, the overall capital ratio of the MMI fund had increased by 1.93 percentage points from a year ago to 8.03%, well above the legal minimum of 2%.
The MMI fund fell below the legal minimum of 2% from 2009 to 2014 and required a bailout of $ 1.69 billion in 2013, which led the Obama administration to raise mortgage insurance premiums for the FHA.
Initial FHA premiums fell from 1.5% of the pre-mortgage mortgage balance to 2.25% in 2010. Annual premiums fell from 0.5% to 1.35% in 2013.
As housing markets recovered and FHA finances improved, annual premiums fell back to 0.85% in 2015. But borrowers are still paying initial FHA premiums of 1.75%, or about 6%. $ 000 on the typical FHA mortgage of $ 343,000.
Borrowers who want to buy a home with a small down payment can instead opt for private mortgage insurance, which is typically required by Fannie Mae and Freddie Mac when homebuyers make downpayment of less than 20%.
With the MMI fund at 8.03%, “It is appropriate for the HUD to quickly review the reductions in FHA mortgage insurance premiums, which have been at their current levels for almost seven years,” said Bob Broeksmit, CEO of the Mortgage Bankers Association, in a statement. “HUD should focus on the price changes that have the greatest impact on affordability and sustainability for borrowers, such as reductions in annual premiums, while being mindful of current delinquency levels in the debt portfolio. FHA and the high number of borrowers who remain in forbearance. “
The National Association of Realtors “strongly supports” legislation to reduce FHA premiums.
Rather than cutting FHA premiums, the FHA’s annual report to Congress details plans to create homeownership opportunities for more borrowers of modest means by expanding homeownership programs. helping home buyers and providing financing for low cost mortgages in low cost markets.
Where problems could arise
During the pandemic, about 1 in 5 homeowners with FHA insured mortgages – over 1.5 million homeowners – signed up for forbearance programs that allowed them to suspend their monthly payments.
By the end of September, most of those borrowers had abandoned forbearance, but more than 387,000 remained, not yet reaching the 18-month program limit. Of these loans, 309,000 were “seriously past due”, meaning that no payments had been made in 90 days or more. Another 350,000 seriously delinquent borrowers do not abstain.
Serious Delinquencies in the FHA Portfolio
A total of $ 110 billion in delinquent loans is insured by the FHA, a 15% increase from the peak of $ 96 billion reached before the pandemic in 2012.
The FHA insured a record $ 342.8 billion in mortgages last year, “at a time when credit was tight in much of the market,” the report notes.
FHA loans by object, 2000-2021
Of the 1.43 million term mortgages insured by the FHA, 59% were purchase mortgages, 84% of which were taken out by first-time buyers.
While the vast majority of these loans are performing well, a potential cause for concern in a housing market downturn is the decline in average credit scores and the increase in debt-to-income ratios of FHA borrowers in recent years.
Debt ratios for FHA purchase loans, 2000-2021
From 2011 to 2019, the average credit score of FHA borrowers increased from 701 to 666 as the FHA increased premiums and borrowers with prime credit scores sought private mortgage insurers instead.
At 43.2%, the average debt-to-income ratio (DTI) for borrowers of FHA purchase loans is up 5.6 percentage points from 20 years ago, after exceeding the 41% peak in 2009 observed during the housing boom. Although the DTI peaked at 43.6% in 2019, in the 12 months ending September 30, nearly one in four FHA borrowers (23.7%) had a DTI above 50%.
This is a cause for concern as higher DTIs increase the likelihood of default in an economic downturn. And falling home prices can make it more difficult for homeowners to avoid foreclosure through a short sale or deed in lieu of foreclosure, resulting in increased claims by lenders against the fund. MMI of the FHA.
The FHA report to Congress points out that changes in home price appreciation can quickly undermine the FHA’s capital reserves.
Home price appreciation and capital ratios of FHA MMI funds
Home price appreciation “is a lagging indicator that tends to overestimate the health of the economy during good times and the weakness of the economy during bad times,” the report notes.
Many years of accumulated appreciation in house prices “may prove insufficient in the face of a sudden and severe turnaround,” the report notes. During the real estate crisis and recession of 2007-2009, the capital ratio of the MMI fund “collapsed from 6.97% to just 0.53%, well below the legal minimum of 2%.
Possibilities of home ownership
While the FHA is not signaling it is ready to cut premiums, it is looking for ways to expand access to mortgage credit, including down payment assistance and support for “little dollar loans.” »In underserved markets.
“For many low- and moderate-income households, the main barrier to homeownership is raising the required down payment,” the report says. “The FHA will explore ways in which it can expand or improve Homebuyer Assistance Programs to better support underserved borrowers, especially people and families of color.”
Share of FHA purchase loans granted with down payment assistance
Ten years ago, 70% of FHA loans were made without down payment. When down payment assistance was provided, it tended to come from a family member (22%) rather than the government (7%).
In the year ending September 30, only 61% of FHA loans were made without some form of down payment assistance, with one family member providing down payment assistance on 23% of loans. loans and the government providing assistance on 15% of loans.
The FHA is also exploring options to increase the availability of low cost mortgages.
“Buyers and owners of properties in low-cost markets often find it difficult to access mortgage credit, which creates another barrier to homeownership for low- and moderate-income borrowers,” the report says. . “Therefore, the FHA will explore the possibilities of overcoming the financial and operational barriers that prevent these loans from being granted. “
The FHA is also evaluating its loan underwriting policies and practices “to identify things that unnecessarily prevent low- and moderate-income borrowers and borrowers of color from obtaining FHA-insured mortgages.” The FHA will explore potential improvements that could allow more qualified borrowers to access FHA-insured mortgage financing.
An Interagency Valuation and Valuation of Equity (PAVE) Working Group examining valuation bias is expected to report to President Biden early next year, and FHA officials expect that the recommendations of the working group “will lead to greater access to property and wealth creation for minority households.
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