the Monday outing of FHA Annual Financial Report was excellent news, confirming the continued strong growth of the FHA capital ratio to over 8%, more than 4 times the statutory minimum required. He renewed the debate on appeals from groups like Community Home Lenders Association [of which this author is the executive director] for the FHA to end its loan term policy it put in place in 2013 and reduce annual premiums to pre-crisis levels.
Immediately after the housing crisis of 2008, the sources of mortgage loans in the private market declined considerably. Private securities, the source of risky predatory risk loans, have collapsed. Many banks either left the market or focused on higher FICO borrowers, favoring cross-selling other products to affluent customers rather than providing mortgages to underserved borrowers.
This left the FHA saving the mortgage and real estate markets, taking new loans during the recession, and dramatically increasing premiums and charging them for the life of the loan, in order to replenish the FHA’s finances. Thirteen years later, despite a complete recovery in housing markets, the PLS market is still moribund and banks are still largely on the sidelines of underserved borrowers.
Monday’s FHA report tells the story. Over 84% of FHA loans last year were for first-time homebuyers, compared to 45.02% for the rest of the mortgage market. Sixteen percent of FHA loans last year were made to black homebuyers, compared to just 6% for the rest of the mortgage market. And 25% of FHA loans last year went to Hispanic buyers, compared to just 10% for the rest of the mortgage market.
So if private mortgage lenders want to come back to the market, we invite them to do so. But it’s the FHA that grants the lion’s share of mortgages to otherwise qualified underserved borrowers who have minor credit problems or need a low down payment loan. And the continued strong growth in the FHA’s finances and capital ratio shows it is being done in a financially responsible manner.
Unfortunately, the FHA Lifetime Premium Policy overcharges every FHA borrower by tens of thousands of dollars. By the time a borrower reaches 78% LTV, that borrower has already paid 10% premiums, which is several times more than the actuarial risk of a loan. Life of Loan deprives FHA’s most underserved borrowers of building essential wealth.
Thus, ending the life of the FHA loan should be a key part of the administration’s racial equity program.
With respect to premium levels, the temporary premium increases designed to replenish the FHA Fund have more than served their purpose. We understand that the FHA should pay attention to risk factors, such as the performance of COVID loans and the potential depreciation in home prices. But our analysis is that even if the performance of COVID loans turns out to be a problem and prices drop, the FHA’s $ 84 billion in cash reserves (a key part of its record 8% capital ratio) are more than sufficient to absorb such losses.
And if the Obama / Biden administration thought it made sense to cut premiums five years ago, when the FHA capital ratio was 2.32%, it’s certainly appropriate that the Biden administration is doing it now. while the ratio is almost four times that level.
We understand that market competitors would like to see FHA decrease. Some support such a policy based on an aversion to government involvement in the mortgage sector. But the CHLA rejects the argument that premiums should be artificially set at a high level due to concerns about FHA’s market share.
In fact, FHA’s market share has steadily declined, FHA’s FHA market share for the year 2020, measured by volume of loans, is less than 10% – the lowest level since 2007.
Let’s be clear. The FHA insures loans that the private market is not interested in making. Thus, the main impact of policies that restrict the FHA’s market share is denying underserved borrowers and minorities the opportunity to buy a home.
And, to the extent that the FHA takes market share from other loan sources, it’s mainly from Fannie Mae and Freddie Mac. But an aversion to government mortgage programs cannot be the cause of such concern; Fannie and Freddie are also supported by taxpayers. And if this is a problem, the FHFA could solve this problem by coordinating a reduction in LLPAs at the same time as the FHA reduces annual premiums.
For 13 years, the Republican and Democratic administrations have been good stewards of the financial health of the FHA. Monday’s MMIF report is proof of that. It is time to reap the rewards of this management.