WASHINGTON – Just over a week after President Biden's tenure, mortgage industry experts and investors are already anticipating a long-awaited cut in the Federal Housing Administration's mortgage premium, but some say a significant cut could be risky.
The Department of Housing and Urban Development under former President Barack Obama announced a planned 25 basis point reduction in the FHA's annual mortgage insurance premiums shortly before President Donald Trump took office. The Trump administration suspended this cut and left the premiums untouched for four years. Most borrowers pay a premium of 0.85%.
But now observers expect the Biden administration to make that 25 basis point cut, and possibly go further, as the new president tries to make housing more affordable and give low-income families and minority families more opportunities to own their homes.
"Between the Biden government's belief that home ownership can be an important means of building wealth for many low-income and middle-class people, and the fact that the FHA program is financially strong today, makes me believe we you will see you are taking some quick steps to better serve this market segment, ”said Brian Chappelle, partner at Potomac Partners and former FHA official.
The FHA announced in November that its mortgage insurance fund's capital reserve ratio had increased from 4.84% in the previous year to 6.10% in fiscal 2020. The agency is legally obliged to maintain a buffer of at least 2% and has approached this threshold several times over the past decade.
The agency's solid capital buffer "provides protection for rapid price changes once the Biden administration staff is in place," said Isaac Boltansky, director of policy research at Compass Point Research & Trading, in a statement to clients. Biden's candidate for HUD secretary, Rep. Marcia Fudge, D-Ohio, is awaiting Senate approval and the administration has not yet appointed an FHA commissioner.
Still, reducing mortgage insurance premiums could be risky as the US continues to battle the coronavirus pandemic. Indeed, former FTA commissioner Dana Wade cited uncertainty about the pandemic as the reason the agency did not cut premiums despite the robust capital metric in November.
FHA borrowers, traditionally first-time buyers and mostly minority and low-income earners, have been hard hit since the public health crisis began. More than 15% of the loans in the FHA book were classified as criminal at the end of the third quarter, up from 8.2% last year. The leniency rate on Ginnie Mae loans, including FHA loans, was 7.83% as of September 30, slightly below April's level at the start of the economic shock, according to the Mortgage Bankers Association.
This raises questions about how much the FHA may need to invest in capital to cover any losses.
"On the premium, I think we should be more careful not to outdo ourselves as the FHA program still has a significant crime rate due to the large number of families still in long-term leniency." he said to Ed DeMarco, president of the Housing Policy Council and former acting director of the Federal Housing Finance Agency.
Agency officials also need to closely monitor when the grace periods end and how many borrowers can return to mortgage payments, said Dave Stevens, a former FHA commissioner who is now the CEO of Mountain Lake Consulting.
“The forbearance numbers in the FHA program are the worst of any mortgage program and concern, so the real question will be how much risk you can take in considering a mortgage insurance premium reduction. Might you need to use your reserves? " he said.
In the eyes of some, a 25 basis point cut could be largely symbolic and achieve a goal the Obama administration was unable to achieve, Stevens said.
The Biden team is widely expected to cut premiums by 25 basis points relatively quickly, perhaps "in the first 100 days," Chappelle said, followed by a larger cut after the agency released its annual report to Congress in November .
"There's no real urgency to cut premiums," said Stevens. “Interest rates are near all-time lows and I think any initial decline is frankly more political. There is no real need to get the mortgage market going. "
Still others fear that a significant premium cut could actually have unintended negative consequences for homebuyers in the FHA program. Ted Tozer, a senior fellow at the Milken Institute and former president of Ginnie Mae, expressed concern that the lack of affordable homes, combined with a premium cut, was contributing to further spike in property prices.
"The borrowers that I think aren't really going to get much benefit from just because I think they're going to fit into home prices very, very quickly at the lower end of the pricing structure," Tozer said. "If everyone … has extra money to use, they will use it, which means that the sellers will be the beneficiaries because the consumers will have more money to spend."
Additionally, according to Tozer, reducing the premium could reduce the amount of money that FHA and HUD borrow and use on rental support and home counseling programs.
While this option is "sensible," Stevens said, the Biden government could also make efforts to increase the supply of affordable housing, which is near record lows.
"In particular, the builders will not want to miss the opportunity to use a larger pool of qualified buyers," he said. "I think there will be motivations to build more houses … and with what the Biden government is likely to do to create more hiring opportunities and maybe deduct tariffs from things like imports of timber from Canada. "
For the Biden team, a premium cut could ultimately be seen as a way to meet the president's stated goals.
"If you're a biden regime and you're thinking about housing policy, I don't think that [the possibility of higher property prices] is an excuse not to help first-time buyers because they always stick to the short end," Stevens said.