The Federal Housing Administration is unlikely to change its stance of forcing homeowners with older mortgages to pay larger insurance premiums in refinancings as Fannie Mae and Freddie Mac loosen their rules to help borrowers lower their payments, according to Barclays Capital.
The FHA, which backs about a third of new U.S. mortgages, boosted its annual premiums in two steps starting in October 2010 as it seeks to avoid tapping taxpayers for support. For borrowers with as little as 3.5 percent in down payments or home equity, the cost rose to 1.15 percent from 0.55 percent.
While a “grandfathering” of the previous premiums for borrowers paying them would be analogous to the U.S. trying to stoke refinancing among loans guaranteed by government-supported Fannie Mae and Freddie Mac, the move would cost the FHA about 3 cents in revenue for each $1 refinanced, Derek Chen, a Barclays Capital analyst, wrote in a report dated Dec. 2.
“It is not clear that these losses would be offset” by a reduction in the agency’s excepted default costs, Chen, a New York-based mortgage-bond analyst, wrote in the report. Unlike Fannie Mae and Freddie Mac borrowers, homeowners with FHA loans also are viewed as not suffering from a lack of “credit availability” because they can often refinance without appraisals or new underwriting, he added.
The report underscores how the FHA, whose financial strength is being scrutinized after a drop in its reserves, has failed to join in a U.S. government push to boost refinancings as the Federal Reserve helps to hold home-loan rates at about record lows. Fannie Mae and Freddie Mac began detailing planned adjustments to their Home Affordable Refinance Program in October, following President Barack Obama’s pledge to “help more people refinance” in a speech to Congress a month earlier.
Officials are “studying” the potential effects on borrowers and the FHA’s insurance fund from any decision to maintain the agency’s premiums in a refinancing, Brian Sullivan, a spokesman for the Department of Housing and Urban Development, which oversees the FHA, said in an e-mail.
In an October interview, Robert C. Ryan, a senior adviser to HUD’s head, said that many borrowers with the agency’s insurance can save money even with the higher costs because of how much loan rates have fallen.
The average rate on a new 30-year FHA loan fell last week to 4.18 percent, or 0.01 percentage point from a record low set three weeks earlier, after reaching as high as 5.88 percent in April 2010, according to Mortgage Bankers Association data. The agency, whose insurance mainly helps protect investors in Ginnie Mae mortgage bonds, also charges consumers 1 percent upfront.
Standards ‘Too Loose’
Chen assigned a “low probability” to changes to the FHA premium policy, which would hurt mortgage-bond investors by increasing prepayments. The agency is similarly unlikely to reverse recent rules that make it harder for borrowers to qualify when adding closing costs to balances, and require lenders to prove new loans help consumers, he said.
The FHA has lagged behind Fannie Mae and Freddie Mac in tightening credit after the housing slump, so “the general impression is that current pricing and underwriting standards are still too loose, rather than too tight,” he said.
More than 2 million FHA loans were used to buy homes in the two years before the annual premium increases, according to data in the agency’s annual report to Congress. It seems wrong to not help those homeowners, who tried to participate in a real estate recovery and will cost taxpayers if they default, said Michael Moskowitz, president of New York-based lender Equity Now Inc.
Borrowers Pay Premiums
“Those people are already an FHA risk already, all you’re doing is reducing it going forward,” he said in a telephone interview.
The FHA’s insurance fund is fed from premiums paid by borrowers. Last month, an independent actuarial analysis concluded that the net worth of the fund stood a 50 percent chance of falling to zero or near zero, which could force it to seek taxpayer support for the first time.
The agency’s capital ratio, a measure of the FHA’s Mutual Mortgage Insurance fund’s ability to withstand losses, fell to 0.24 percent from 0.5 percent a year earlier and 3 percent in 2008. The FHA has failed to meet the legal minimum 2 percent ratio for three straight years.