Julian Castro told the House Financial Services Committee on Wednesday that the Federal Housing Administrations (FHA) historically high premiums limit affordability and almost certainly discourage some first time homebuyers from entering the housing market. The Department of Housing and Urban Development secretary said that FHA is in a strong position to take its "modest" recent step of reducing its premiums to correct this deficit.
Castro said it is clear that housing is reemerging as an engine of economic prosperity, an emergence FHA has facilitated through its countercyclical role stabilizing the market during the recession. "Unfortunately, there are some who try to include FHA with all the bad actors that caused the housing crisis. That could not be more wrong. FHA never pushed the toxic products that did so much damage. It didn't bring down the market - it saved it," the Secretary said.
But FHA also suffered losses with its Mutual Mortgage Insurance Fund (MIF) falling into negative territory as loan defaults and foreclosures mounted. As it strove in the years following the housing market crash both to price for risk and to replenish MIF, it raised its annual premiums 5 times, a total of 145 percent. Castro quoted National Association of Realtors' estimates that in 2014 between 234,000 and 255,000 creditworthy borrowers were priced out of the market because of high premiums.
The issue became more complicated as interest rates fluctuated and fell as FHA premiums climbed. Thus the benefits from low rates that should have accrued to potential borrowers and spurred first time buyers were partially offset by the premium increases. "With FHA firmly on the right track, our responsibility now is to provide responsible borrowers, who are ready to buy, with affordable options to purchase a home," the Secretary said.
Prior to the recent decision to cut the annual premium by 0.5 percent, a change which went into effect on January 26, FHA was collecting almost four times the amount needed to cover the risk posed by its newest borrowers. The Administration's independent actuary estimates that FHA will collect an average of $17,000 in fees from borrowers over the life of loans originated in FY 2014 while the average loss from these loans will be $4,700.
The costs facing families that want to pursue the American Dream are unnecessarily high and it isn't right to unduly burden today's borrowers because of the misbehavior of others in the past Castro said. The half point reduction in the annual mortgage insurance premium is expected to save more than 2 million households over $2 billion during the next three years. FHA also expects it to encourage more than a quarter million new borrowers to enter the market, creating tens of thousands of jobs. HUD projects it will expand the number of first time homebuyers served by FHA by over 16 percent compared to FY 2014 and Moody's Analytics estimates a similar magnitude of effect with 45,000 additional households purchasing a home this year as a result of the decrease, and an additional 100,000 in 2016.
More than two million future homeowners may save an average of $900 per year over the next three years and FHA anticipates another 100,000 to 200,000 households will refinance with FHA to take advantage of potential savings, dollars that will be returned to the economy in other ways. The lower premium also increase home purchasing power by producing savings equivalent to a significant drop in the home price. This is critical given that increasing home prices, while good for the economy, present a serious barrier to entry for first time homebuyers.
FHA can take this step because of aggressive action in the past to improve underwriting standards and set higher minimum net worth requirements for lenders. This has returned the MIF to the black, growing it by more than $21 billion in just two years to a net worth of $4.8 billion.
Even with the recent cut the premiums remain 50 percent higher than their pre-crisis levels and is still sufficient to account for risk. HUD estimates show the change will not alter FHA's positive trajectory with the Fund expected to grow by at least $7 billion over each of the next several years, reaching and exceeding the 2 percent capital reserve ratio required by Congress within two years, not materially behind earlier estimates.
Castro said the market has responded positively to the change. The Mortgage Bankers Association believes that reducing premiums reduces the risk to the portfolio over time and Moody's economists recently released an independent report on the premium reduction which demonstrates that this action will help the economy and protect the long-term health of the Fund. The report found, "While there is no magic policy bullet, allowing the FHA to reduce its insurance premiums for first-time and lower- income homebuyers will provide a meaningful boost. It also will protect taxpayers, as the premiums are high enough to put the FHA on solid financial ground." Additionally, Moody's predicts that the cut will support 140,000 more jobs and close approximately one-tenth of the current labor market gap.
