A reduction in the mortgage insurance premium of the Federal Housing Agency is likely to occur at some point in the next four years, according to a report by BTIG.
The Biden administration was expected to revive the 25 basis point cut in the FHA premium proposed at the end of the Obama administration. In light of soaring crime rates and the pandemic, the new Minister for Housing and Urban Development, Marcia Fudge, has put the Kibosh in such a move for now.
"Our interpretation of the statement is that 'short term' is 2021 and that the FHA's decision-making process will be tied to the FHA's serious crime rate," said Ryan Gilbert, an analyst at BTIG, in the report. "We believe that an improving economy and appreciation in house prices will ultimately lead to normalized serious crime rates, and we continue to give a mortgage insurance premium, which will be lowered at some point during Biden's first term, a greater than 50% probability."
Still, the decision not to lower premiums should improve the perception of mortgage insurers in the eyes of investors, and even if there were, it would have little practical effect, said Bose George of Keefe, Bruyette & Woods in an issued note Fudges announcement.
"While we continue to believe that the impact of a cut in FHA premiums would be small in terms of shifting the stake from mortgage insurers to FHA, we view this news as positive for mortgage insurers," wrote George.
During the Great Recession, the FHA became the dominant player in credit enhancement for low down payment mortgages. Over the years, however, private mortgage insurers had gained market share as measured by insurance policies in place.
US mortgage insurers, the trading group for PMIs, welcomed the announcement, calling it a prudent policy that will continue to give borrowers access to credit while mortgage rates remain near historically low levels.
"This will enable the FHA to better manage the financial challenges posed by the pandemic and ensure taxpayers are protected from unnecessary credit risk," USMI President Lindsey Johnson said in a press release. "The private MI industry has the capacity and desire to help even more families become homeowners through the conventional market."
The fear of the stock market investors is that an FHA premium cut could turn the business away from the private mortgage insurers again.
At the end of the 2020 federal fiscal year, the FHA had an insured sum of $ 1.46 trillion.
As a group, the six active private mortgage insurers had $ 1.29 trillion as of December 31, according to records from the Securities and Exchange Commission. Arch had $ 280.6 billion; MGIC, $ 246.6 billion; Radian, $ 246.1 billion; Genworth, $ 207.9 billion; Essent, $ 198.9 billion; and National MI: $ 111.2 billion.
Three companies in run-off status that also still have insurance on their books would bring the market share even closer. In November 2019, they combined accounted for 1% of total public and private mortgage insurance, as George had noted. That proportion has likely decreased since then.
However, the market overlap between FHA and private MIs for new business is decreasing, as Gilbert noted in his report. He noted that for the third quarter, 78% of the FHA's business was for loans between 96% and 98% loan-to-value ratios. This compared to an average of 9% in the same range for the mortgage insurers.
"With little market overlap, we estimated that reducing the FHA MEP by 25 basis points would only reduce PMI premiums by 1 basis point and our return on equity by 30 basis points," continued Gilbert.
Earlier, however, George had raised concerns that a possible 50 basis point reduction in the FHA premium could lead to a move away from private mortgage insurers when it comes to writing new business.
In 2020, private mortgage insurers supported $ 600 billion in mortgage origins, with 65% purchases and 35% refinances, according to the USMI.
For the entire year, Arch wrote most of the business, displacing MGIC with $ 112.2 billion to $ 112.1 billion. Third in terms of newly purchased insurance was Essent with $ 107.9 billion, followed by Radian with $ 105 billion; Genworth, $ 99.9 billion; and National MI: $ 62.7 billion.