Letter to HUD Deputy Secretary Golding 10/13/16 – Another request to FHA to further reduce annual premiums and end "Life of Loan" policy


2101 Wilson Boulevard, Suite 610
Arlington, VA 22201
(571) 527-2601

October 13, 2016

Mr. Edward Golding
Principal Deputy Assistant Secretary
Office of Housing
Department of Housing and Urban Development
451 7th Street SW
Washington, DC 20410
Dear Mr. Golding:
The Community Home Lenders Association (CHLA) writes to renew our request, first made a year ago, that the Federal Housing Administration (FHA) implement another round of reductions in FHA annual premiums, down to their pre-crisis level of .55%. We also urge FHA to end its “Life of Loan policy, by restoring the termination of premiums when an FHA loan reaches 78% of the original principal balance.
This request is prompted by a recent Federal Reserve report concluding that the prior premium cut had a strong impact on purchase loans, and in anticipation of a strong FHA MMIF Actuarial Report next month, which we believe would pave the wave for a premium cut. A premium cut would also help FHA improve homeownership affordability and mortgage access to credit – thus helping it meet its statutory Operational Goal that requires FHA to meet “housing needs of the borrowers” the program “is designed to serve.”
In the wake of the 2008 housing crisis, FHA dramatically raised both upfront and annual premiums for the purpose of addressing losses – losses which were incurred as a result of FHA stepping in to maintain mortgage credit as private mortgage sources generally exited the market. Specifically, annual premiums increased from .55% to 1.35% for most loans. These increases served their function, by generating substantial profits for FHA over several years and thus building up FHA’s reserves and Net Worth.
Prior FHA Premium Reduction Had a Strong Impact on Housing Affordability
In January 2015, as FHA finances improved, FHA took appropriate action to reduce annual FHA premiums from 1.35% to .85%. The impact was immediate, significant and very positive.
As you yourself stated in FHA’s 2015 Annual Management Report:
“Reducing the MIP had a number of positive effects: saving new borrowers an average of $900 annually; allowing existing borrowers to refinances at today’s low rates; and growing the housing market as a whole.”
You went on to note that the volume of FY 2015 FHA home purchase loans grew by 27% compared to the prior year, and refinances grew by 90%, further noting that:
“The MIP reduction also made it possible for over 75,000 new creditworthy borrowers to purchase homes in the first eight months after the MIP reduction went into place. The increase in forward endorsements over the prior fiscal year has been driven by FHA’s premium reduction. The modest reduction has provided a path to responsible homeownership for hardworking Americans – particularly for those with less than perfect credit.”
A September 29th report issued by the Federal Reserve confirmed this dramatic impact, stating that:
“The volume of FHA home purchase loans is apparently quite sensitive to MIP changes. “
But equally important, the Fed rebutted claims by some that FHA was primarily taking market share away from other lenders – instead concluding that the impact was to increase homeownership opportunities for the borrowers FHA is intended to serve – lower credit score, high LTV borrowers. Specifically, the report concluded that:
“We find that lowering the annual MIP in 2015 substantially increased the number of loans to lower credit score, high LTV borrowers — who as a group rely heavily on FHA insurance.”
Strong FHA Financial Performance
The FHA premium cut and resulting volume growth took place at the same time that FHA continued its strong financial performance. Last year’s 2015 FHA Actuarial Report showed that FHA’s Net Worth grew to $23.8 billion and the Fund exceeded its 2% Net Worth requirement for the first time in many years. Moreover, according to this year’s budget projections, new FHA loans continue to produce substantial profits for taxpayers – $7.733 billion in the current FY 2016, rising to a projected $9.017 billion FY 2017. This reflects a net profit of 3.7% of each new loan this year – rising to 4.42% next year.
Moreover, as FHA’s Annual Management Report notes, the FHA loan volume increased by $78 billion in the year the premiums were reduced, concluding that “This increase in volume resulted in an increase of $1.5 billion in premiums collected from FY 2014 to FY 2015.”
In light of these developments – and assuming the 2016 Actuarial Report continues to show strong financial performance, with a further increase in FHA’s Net Worth – CHLA believes it is both appropriate and essential to provide a further annual premium reduction, to improve homeownership affordability.
We would like to point out that even with the suggested reduction in annual premiums, FHA “upfront” premiums would still exceed levels in place before the 2008 housing crisis. A premium reduction is also justified in light of FHA’s strong loan performance, as evidenced by the following metrics:
• FHA’s 90+ day delinquency rate has steadily improved from a 9.92% level in January 2012 to 4.89% currently. And the dollar volume of seriously delinquent loans has fallen 48% over the last four years – from $95 billion in January 2013 to $49 billion currently.
• FHA’s total delinquency rate is now at the lowest level since FHA started collecting 30- and 60-day delinquency data in 2006.
Ending FHA’s Life of Loan Policy
CHLA is also renewing its call for an end to FHA’s Life of Loan policy.
In 2013, FHA revised its longstanding policy of eliminating the charging of annual premiums on loans that are paid down to a 78% of the original principal balance. That prior policy had made FHA loans more consistent with statutory requirements for private mortgage insurance premiums. Restoring this elimination is also fairer for the borrower, since by the time a borrower reaches the 78% point, the total of FHA premiums paid greatly exceed the original risk such premiums are intended to cover. In practice, the Life of Loan policy also encourages refinances out of good quality, seasoned FHA loans into other loans that better recognize the reduced credit risk of lower LTV loans. Finally, reinstating the old policy would have a minimal revenue loss – and in fact could even increase revenues if it averts re-financings.
FHA should restore its previous policy – or if appropriate, establish some other LTV strike point or premium structure which more accurately prices the risk of more seasoned loans.
Sincerely Yours,