The Federal Housing Administration’s (FHA) recent annual report to Congress confirmed as much: the reduction in mortgage insurance premiums will not materialize anytime soon.
This puts an end to rumors about the reduction being reinstated after President Trump suspended it indefinitely along with other last-minute policies from the Obama administration.
Should the mortgage insurance premium cut push through, we’ll report it right away.
How Healthy Is FHA’s Mutual Mortgage Insurance Fund?
HousingWire previously relayed what Beth Zorc, deputy general counsel of HUD said about the mortgage insurance cut at the National Association of Realtors’ recent conference:
“HUD is continuing to look at the issue and will have additional information to share later in November and will have additional information to share later in November and will make its decision based on the health of FHA’s Mutual Mortgage Insurance Fund.”
Days later, the FHA submitted its report for fiscal year 2017, detailing the health of the MMI Fund whose capitalization would have fallen below its statutory minimum requirement if the mortgage insurance cut pushed through.
The health of the fund is important because through it the FHA is able to insure mortgages made to low-income borrowers especially first-time homebuyers who constituted more than 80% of FHA purchase mortgage borrowers in FY 2017.
As of FY 2017, the capitalization ratio of the fund is 2.09%, above its statutory minimum requirement of 2% set by Congress. But it is a decrease from the previous fiscal year’s capitalization ratio of 2.35%.
The fund’s economic net worth also dropped by $1.9 billion to $25.6 billion in FY 2017.
Mortgage Insurance Cut: Its Effect on the Fund?
One important point taken up in the annual report is the possible effect of the reduced mortgage insurance premiums on FHA-backed forward loans.
Back in January, the FHA said it will reduce annual mortgage insurance premiums (AMIP) on FHA loans by 25 basis points effective on or after 27 January 2017.
Households are expected to save $500 a year as a result of paying lower insurance premiums. But just an hour after being sworn in, Pres. Trump suspended the reduction.
Was it a wise move? The FHA answered in the annual report:
“Had the AMIP reduction taken effect as announced, FHA estimates that the MMIF Capital Ratio would have fallen below FHA’s statutory minimum Capital Ratio of 2.00 percent to 1.76 percent, resulting from a reduction in Cash Flow NPV of $3.2 billion and an increase in IIF of $45 billion.”
Cash Flow NPV refers to Cash Flow Net Present Value and IIF means Insurance-in-Force.
In the past, a reduction in mortgage insurance premiums led to an increase in the share of FHA loans in the market in 2015 and the years that follow, the same report noted.
But the FHA may be in a different situation now. As of FY 2017, the FHA has 1.2 million active forward mortgages with a total unpaid principal balance of $251 billion. Its HECM portfolio handling reverse mortgages for seniors has claims rising to $5 billion.
Indeed, the annual report identified HECMs as having a negative capital ratio of 19.84%, a far cry from the FHA loan portfolio’s 3.33%. To stabilize the HECM situation, the FHA has made substantive changes in the insurance premiums and principal limit factors.
“While FHA’s capital position is supported by positive trends in housing markets and the broader economy, it requires HUD’s close attention going forward,” Dr. Ben Carson, secretary of the HUD, said in the annual report.
“Given FHA’s total FY 2017 portfolio of approximately $1.23 trillion of insurance in force, it is critical that FHA continue [sic] to closely monitor the fiscal condition of the MMIF and manage taxpayer exposure.”
A full-text copy of the annual report is available here.Click to See the Latest Mortgage Rates»