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.