Magazine article American Banker

Pressure Building on FHA to Cut Premiums Again

Magazine article American Banker

Pressure Building on FHA to Cut Premiums Again

Article excerpt

Byline: Brian Collins

WASHINGTON -- A financial report due out soon could reignite a battle over whether the Federal Housing Administration should again reduce its annual premium.

The FHA last cut premiums in January 2015, a move that unleashed a lot of pent-up demand for agency-insured mortgages. While many in the industry have been urging FHA to make another cut, the agency has resisted due to concerns about its reserve fund, which rebounded last year but is still being watched carefully by nervous lawmakers.

But the agency is likely to come under more intense pressure to make another cut if independent auditors give the fund a positive review in a report due out in early November.

Many analysts expect the agency to move quickly.

The "odds favor FHA cutting premiums this fall," said Jaret Seiberg, a Washington policy analyst at Cowen & Company, in a recent report to clients.

FHA may want to be "cautious" about a premium reduction, but it is "still hard for first-time buyers and --especially minorities -- to get credit."

Isaac Boltansky, a policy analyst at Compass Point, put the odds of a premium cut by yearend at 60%.

Some industry representatives aren't waiting for the results of the audit to be public. Scott Olson, the executive director of the Community Home Lenders Association, wrote a letter urging the FHA to cut the annual premium from 85 basis points to 55.

The last premium cut "made it possible for 75,000 new creditworthy borrowers to purchase homes in the first eight months," he wrote. "Assuming the 2016 actuarial report continues to show strong financial performance, with an increase in FHA's net worth -- CHLA believes it is appropriate and essential to provide for a further annual premium reduction to improve homeownership affordability."

Helping his case is a Federal Reserve Board research report that shows the 2015 FHA premium reduction boosted home buying without stealing customers from private mortgage insurance companies.

"We provide evidence that the resulting rise in FHA market share reflects, in part, an increase in the overall volume of lending, as opposed to simply a shift from private insurance into FHA insurance,"' the Fed researchers said. "We suspect that the immediate increase in lending occurred because the MIP reduction improved applicants' debt payment to income ratios and thus their chances of credit approval."

Olson said in an interview that the research appears to "confirm that the prior premium cut generated new loans as opposed to taking market share from other lenders or the PMIs.

"So you are not taking market share. You are producing new loans for these targeted borrowers," he said.

The analysis also shows that premium levels have an impact on borrower eligibility, according to mortgage consultant Brian Chappelle. …

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