Search

Castro tells Congress FHA Reductions Sound, Beneficial

by devteam February 12th, 2015 | Share

Julian Castro told the House Financial Services Committee on Wednesdayrnthat the Federal Housing Administrations (FHA) historically high premiums limitrnaffordability and almost certainly discourage some first time homebuyers fromrnentering the housing market.  ThernDepartment of Housing and Urban Development secretary said that FHA is in arnstrong position to take its “modest” recent step of reducing its premiums torncorrect this deficit.</p

Castro said it is clear that housing isrnreemerging as an engine of economic prosperity, an emergence FHA has facilitatedrnthrough its countercyclical role stabilizing the market during thernrecession.  “Unfortunately, there arernsome who try to include FHA with all the bad actors that caused the housingrncrisis.  That could not be more wrong.  FHA never pushed the toxicrnproducts that did so much damage.  It didn’t bring down the market – itrnsaved it,” the Secretary said.  </p

But FHA also suffered losses with itsrnMutual Mortgage Insurance Fund (MIF) falling into negative territory as loanrndefaults and foreclosures mounted.  As it strove in the years following thernhousing market crash both to price for risk and to replenish MIF, it raised itsrnannual premiums 5 times, a total of 145 percent.  Castro quoted National Association ofrnRealtors’ estimates that in 2014 between 234,000 and 255,000 creditworthyrnborrowers were priced out of the market because of high premiums.  </p

The issue became more complicated asrninterest rates fluctuated and fell as FHA premiums climbed.  Thus the benefits from low rates that shouldrnhave accrued to potential borrowers and spurred first time buyers werernpartially offset by the premium increases. rn”With FHA firmly on the rightrntrack, our responsibility now is tornprovide responsible borrowers, who are ready to buy, with affordable options tornpurchase a home,” the Secretary said.</p

Prior to the recent decision to cut the annual premium by 0.5 percent,rna change which went into effect on January 26, FHA was collecting almost fourrntimes the amount needed to cover the risk posed by its newest borrowers.   The Administration’srnindependent actuary estimates that FHA will collect an average of $17,000 inrnfees from borrowers over the life of loans originated in FY 2014 while thernaverage loss from these loans will be $4,700.</p

The costs facing families that want to pursue the American Dream arernunnecessarily high and it isn’t right to unduly burden today’s borrowersrnbecause of the misbehavior of others in the past Castro said.  The half point reduction in the annualrnmortgage insurance premium is expected to save more than 2 million householdsrnover $2 billion during the next three years. rnFHA also expects it to encourage more than a quarter million newrnborrowers to enter the market, creating tens of thousands of jobs.  HUD projects it will expand the number ofrnfirst time homebuyers served by FHA by overrn16 percent compared to FY 2014 and Moody’s Analytics estimates a similarrnmagnitude of effect with 45,000rnadditional households purchasing a home this year as a result of the decrease,rnand an additional 100,000 in 2016. </p

More than two million futurernhomeowners may save an average of $900rnper year over the next three years and FHA anticipates another 100,000 torn200,000 households will refinancernwith FHA to take advantage of potential savings, dollars that will be returnedrnto the economy in other ways.  The lowerrnpremium also increase home purchasingrnpower by producing savings equivalent to a significant drop in the home price.rnThis is critical given that increasing home prices, while good for therneconomy, present a serious barrierrnto entry for first time homebuyers.</p

FHA can take this step because of aggressive action in the past tornimprove underwriting standards and set higher minimum net worth requirementsrnfor lenders.  This has returned the MIFrnto the black, growing it by more than $21 billion in just two years to a netrnworth of $4.8 billion.  </p

Even with the recent cut the premiums remain 50 percent higher thanrntheir pre-crisis levels and is still sufficient to account for risk.  HUD estimates show the change will not alterrnFHA’s positive trajectory with the Fund expected to grow by at least $7 billionrnover each of the next several years, reaching and exceeding the 2 percentrncapital reserve ratio required byrnCongress within two years, not materially behind earlier estimates.  </p

Castro said the market has responded positively to the change.  The Mortgage Bankers Association believesrnthat reducing premiums reduces the riskrnto the portfolio over time and Moody’s economists recently released an independent report on the premiumrnreduction which demonstrates that this action will help the economy and protect the long-term health of the Fund.rnThe report found, “While there is nornmagic policy bullet, allowing the FHA to reduce its insurance premiums forrnfirst-time and lower- incomernhomebuyers will provide a meaningful boost. Itrnalso will protect taxpayers, as thernpremiums are high enough to put the FHA on solid financial ground.”rnAdditionally, Moody’s predicts thatrnthe cut will support 140,000 more jobs and close approximately one-tenth of the current labor market gap.

All Content Copyright © 2003 – 2009 Brown House Media, Inc. All Rights Reserved.nReproduction in any form without permission of MortgageNewsDaily.com is prohibited.

About the Author

devteam

Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

See all blogs
Share

Comments

Leave a Comment

Leave a Reply

Latest Articles

Real Estate Investors Skip Paying Loans While Raising Billions

By John Gittelsohn August 24, 2020, 4:00 AM PDT Some of the largest real estate investors are walking away from Read More...

Late-Stage Delinquencies are Surging

Aug 21 2020, 11:59AM Like the report from Black Knight earlier today, the second quarter National Delinquency Survey from the Read More...

Published by the Federal Reserve Bank of San Francisco

It was recently published by the Federal Reserve Bank of San Francisco, which is about as official as you can Read More...