WASHINGTON — The Federal Housing Administration’s recent premium reduction is undercutting the private sector and expanding the government’s role in the housing market, housing finance industry representatives told a House subcommittee on Thursday.
House Republicans have argued that the FHA was wrong to make a cut to its annual mortgage insurance premium before its reserve fund reached a statutory minimum — and witnesses agreed, but said the impact went beyond that.
“The FHA has exposed the taxpayer to unnecessary risks by lowering its premium…it hasn’t taken the right steps to restore capital adequacy and in the process of lowering premiums attracted a riskier portfolio,” said Douglas Holtz-Eakin, president of the American Action Forum.
The FHA made a 50-basis point cut in January in an effort to boost credit availability in the housing market. But industry representatives said the move is stopping private capital from returning to the market.
Rohit Gupta, president of Genworth Mortgage Insurance said the mortgage insurance industry has built up its war chest and is ready to deploy capital to borrowers who are unable make the 20% down payment for a conventional mortgage — and use mortgage insurance as a supplement. But the premium decrease for borrowers with higher credit scores is squeezing them out of the market, he claimed.
Gupta said private mortgage insurance and FHA should serve “complementary” roles with FHA providing access to credit to underserved borrowers and PMI serving borrowers on the higher end.
“Once we go below 620 FICO, it is not possible for private MI companies to compete with FHA in that space, given FHA’s pricing. So we believe we have the right complementary roles when it comes to low credit borrowers,” Gupta said.
He added that when the FHA reduces premiums for borrowers in the 680-760 FICO range, it becomes very difficult for PMI to compete in what is their traditional customer base.
Holtz-Eakin seconded that point saying, “The reduction in premium is not exclusively for those with under 620 [FICO], it is a reduction in premium for everyone.”
“So this is not a targeted policy on an unserved group…and is however modest or large you want to characterize it, a change in their policy from a couple years ago.”
He added that in the past, the FHA has played a countercyclical role in the housing market, being the go-to source for credit when financing is unavailable, but lowering premiums when credit is available “is a discretionary pro-cyclical cut in premiums and that is an unwise thing to do.”
However, Julia Gordon, director of housing and consumer finance policy at the Center for the American Progress, said the FHA is not cutting insurance premiums to increase market share but that “at this point, they had hiked the premiums up so much they had overshot with the credit quality remaining really high.”
Another effect of lowering insurance premiums is delaying the timeline for the FHA fund to reach a capital reserve ratio of 2.0% to protect against losses. The health of the fund has been improving, but still stands at just 0.41% according to a 2014 actuary review that also projected the fund would reach the 2.0% requirement by 2016.
“One thing that changes with these price decreases is that trajectory has the potential to change,” Gupta said.
Clifford Rossi, a professor at the University of Maryland who also testified, said it is unclear how accurate the actuary projection is and that the estimates were made before the premium decrease.
“We have extraordinary amount of model risk,” Rossi said and added that lowering the premiums “would extend the timing of when the fund would be in compliance with the statutory threshold.”
But Rep. Michael Capuano, D-Mass., who also sits on the Housing and Insurance subcommittee said the argument that the fund is not on the right upward trajectory misses the mark.
“We are heading in the right direction by anybody’s measure,” and added arguing the trajectory is a moot point unless the fund starts to diminish again.
Gordon added that part of the decision to lower premiums was the pace at which the fund was building. “Right now these books of business are so clean. They are throwing off these record profits and surely will continue shoring up the fund.”