2101 Wilson Boulevard, Suite 610
Arlington, VA 22201
February 18, 2014
Hon. Sylvia Mathews Burwell
Office of Management and Budget
725 17th Street NW
Washington, DC 20503
Dear Director Burwell:
The Community Home Lenders Association (CHLA) is writing to request that the Administration include a reduction in FHA annual premiums in its FY 2015 Budget.. We recommend this change in order to allow FHA to more fully meet its mission of affordable mortgage credit, while maintaining a steady policy of shoring up the FHA MMIF Fund.
Specifically, the CHLA recommends that FHA premiums on purchase loans should be revised as follows:
* Reduce the annual FHA premium from 1.35% to .75% [and down to .5% for homeowners that complete HUD-approved pre-purchase homeownership counseling],
* Increase the upfront FHA annual premium to as high as 3% [as a partial offset to the revenue loss from reducing the annual premium], and
* When the FHA reaches its 2% net worth standard, further reduce the annual premium to .5% for all borrowers.
The economic crisis of 2008 was to a significant extent precipitated by subprime lending and the collapse of our housing markets. As private lending collapsed, FHA played a critical role in providing mortgage credit to cushion and stabilize mortgage and housing markets. As a result, FHA sustained some strain in its finances, particularly as housing prices moved downward from 2008 to 2010.
In recent years, FHA took important steps to improve credit quality of FHA loans and to raise premiums, in order to shore up FHA’s financial health and its MMIF Fund. However, as FHA moves into the black financially, we are concerned that FHA’s excessive levels of premiums – particularly the 1.35% amount charged annually on a loan – risks making home purchase for many homebuyers unaffordable. This could retard our housing recovery, which still faces a continued overhang of homes in default and foreclosure.
We believe that continuation of the current high premium levels runs the risk of priortizing too rapid an increase in FHA’s net worth at the expense of home purchase affordability with respect to FHA loans.
Moreover, excessive premium levels can to some extent undermine the financial health of FHA. First, excessive premium levels can create adverse selection, where FHA could become the lender of last resort, predominately serving the least credit-worthy borrowers. Secondly, excessive premiums can result in a loss of loans to good credit quality borrowers who seek other loan outlets – thus reducing volume and the revenues that go with it. Finally, excessive annual premium levels can result in refinances when the FHA loan ages – depriving FHA of revenues from such loans at precisely the time when they have become much safer.
Therefore, CHLA proposes an immediate reduction of annual premiums to levels more in line with historical pricing – ie., down to .75% annually. In addition, since FHA has made a case that prepurchase counseling reduces risk, an additional reduction down to .5% for such borrowers is warranted. Finally, when FHA reaches a 2% net worth level, we believe the annual premium should revert to a long-time historical level of .5%
We are mindful that these reductions would reduce the net present value of the profits that FHA makes on new loans. However, the FY 2014 budget projected a net present value over the life of the loan of a profit of 7.25% on each and every loan – and we have reason to believe that FY 2015 levels will be even higher. While FHA was in the red financially, this made some sense – but we believe these very high profit levels are no longer justified, in light of their adverse effect on home purchase affordability.
We are mindful of FHA financial considerations, and therefore our proposal balances an annual reduction with an increase in the upfront premium, up to as much as 3%. These upfront premiums have a much less significant effect on debt to income ratios and therefore home purchase affordability.
This increase would likely recoup around 40% of the loss of the annual reduction, thus cushioning the financial impact. Moreover, using last year’s OMB budget projections, new FHA loans would still produce a hefty profit – estimated at around 5.5% per loan – under our proposal. And net profits for the entire FHA program for new loans would still exceed an estimated $10 billion a year.
We would also note that our proposed combination of reducing annual premiums and raising upfront premiums actually accelerates the accumulation of cash reserves for FHA – a good outcome.
For all these reasons, the CHLA recommends that FHA ease up the large premium increases of recent years – to more fully support FHA’s mission of providing affordable home purchase loans , while maintaining a steady and stable path toward financial recovery of the FHA Fund and program.
COMMUNITY HOME LENDERS ASSOCITION