Obama to Cut FHA Mortgage Insurance Premiums to
Boost Homeownership
By Clea Benson and Jonathan Allen Jan 7, 2015 1:00 PM CT
In an effort to expand
homeownership among lower-income buyers, President Barack Obama plans to cut
mortgage-insurance premiums charged by a government agency.
The annual fees the Federal
Housing Administration charges to guarantee mortgages will be cut by 0.5
percentage point, to 0.85 percent of the loan balance, Julian Castro, secretary
of the Department of Housing and Urban Development, said today during a conference
call with reporters. Under the new premium structure, FHA estimates that 2
million borrowers will be able to save an average of $900 annually over the
next three years if they purchase or refinance homes.
Shares of private insurers that
compete with the FHA fell on the news, which Obama plans to discuss during a
visit to Phoenix tomorrow.
“We believe this is striking a
very good balance between being fiscally responsible and also enhancing
homeownership opportunities,” Castro said.
‘Locked Out of Market’
The FHA has
been increasing premiums since 2011 to offset losses caused by defaults on
mortgages it backed after the housing bubble burst. Housing industry
participants say the increases in annual fees, which are now at 1.35 percent of
the loan balance, are squeezing buyers with modest incomes out of the market.
“Lots of people
have been locked out of the market, particularly lower-wealth borrowers and
borrowers of color, by the high prices at FHA,” said Julia Gordon, director of
housing finance and policy at the Center for American Progress, a group
affiliated with Democrats. The premium cut “does put homeownership within the
reach of more people.”
The FHA
estimates that 250,000 first-time homebuyers will enter the market after the
premium reductions.
In addition to
its annual premiums, the FHA also charges borrowers an upfront fee, which is
currently set at 1.75 percent of the loan balance and is not slated to change.
‘Broken FHA’
Democrats and housing groups say
reducing FHA fees will help the agency’s bottom line because it will boost the
volume of lending, which declined when homebuyers had to pay more to obtain
loans. A December study by the Mortgage Bankers Association said the premium
increases had reduced the value of the insurance fund by $4.4 billion as higher
costs drove away creditworthy borrowers.
Republicans have said premium
cuts should be off the table because the agency’s insurance fund remains below
legally required levels. House Financial Services Committee Chairman Jeb
Hensarling said last month that “a broke FHA is a broken FHA.”
“This sounds like a move in the
wrong direction,” said Mark Calabria, director of financial regulation studies
at the Cato Institute, which supports free markets. “FHA has a portfolio of
poor quality loans. This will end up costing the taxpayer considerably.”
The agency is required to keep
enough cash on hand to cover all projected losses in its $1.1 trillion
portfolio. The insurance fund required a $1.7 billion draw from the Treasury
Department last year. In fiscal 2014, the fund posted its first positive
balance in two years.
Shares Slide
The fund must also maintain a
cushion of 2 percent of its value, a level it isn’t projected to reach until
fiscal 2016.
Castro, who is scheduled to
accompany Obama to Phoenix, said the fee cut would have a “marginal” impact on
the insurance fund.
Radian (RDN) Group Inc., which
sells insurance to homebuyers, slid 5.5 percent to $15.62 at 1:53 p.m. in New
York trading. MGIC Investment Corp. (MTG) slumped 4.7 percent and Essent
Group Ltd. (ESNT) fell 9.4 percent.
Radian climbed 18 percent last
year after more than doubling in both 2012 and 2013 and had said it benefited
as private companies gained market share from the government.
Mortgage insurance helps cover
losses when homeowners default and foreclosures fail to recoup costs. The
coverage is typically required when borrowers’ down payments are less than 20
percent of a home’s price.
The FHA had a 30 percent share of
the mortgage insurance market in the third quarter of last year, down from
about 69 percent in 2009, according to data from Inside Mortgage Finance.
Private firms wrote 42 percent of the coverage in last year’s third quarter,
and a government program for veterans accounted for most of the remainder.
Some Ginnie Mae-guaranteed
securities backed by FHA loans also declined on concern that more borrowers
will find it worthwhile to refinance, repaying debt that’s trading at higher
prices at face value. Bonds with 3 percent coupons fell by 0.15 cent on the
dollar more than similar-duration Treasuries as of 11 a.m. in New York,
according to data compiled by Bloomberg, after typically outperforming
government debt when bond prices have dropped in recent months.
To contact the reporters on this
story: Clea Benson in Washington at cbenson20@bloomberg.net; Jonathan Allen in
Washington at jallen149@bloomberg.net
To contact the editors
responsible for this story: Jesse Westbrook at jwestbrook1@bloomberg.net
Gregory Mott