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Will FHA Further Cut MI Premiums?

house-sittingon-moneyIt has been two years since the Federal Housing Administration (FHA) lowered its mortgage insurance premiums by 50 basis points down to 0.85 percent.

The move two years ago was designed to make homeownership more affordable for first-time homebuyers trying to enter the market. The FHA estimated at the time of the move that it would save homeowners approximately $900 annually.

Reducing the MI premium two years ago drew praise from some, but at the same time was a highly controversial move—at the time, the Mutual Mortgage Insurance (MMI) fund’s capital ratio was at 0.41 percent, less than a quarter of the 2 percent threshold required by Congress. Critics of the move accused the FHA of cutting off a potential revenue stream when the capital ratio was so far below the Congressionally-mandated level.

Since then, the MMI fund’s capital ratio has increased up to 2.32 percent to a value of $27.8 billion as of the end of FY2016. In fact, it was above 2 percent at the end of FY2015, which fueled speculation of future mortgage insurance premium cuts by the FHA. Some in the industry openly called for further reduction to the MI premium, such as the National Association of Realtors last April.

Critics of the reduction say a further reduction would exposed taxpayers to more risk. FHA was forced to take a $1.7 billion taxpayer-funded bailout in 2013 to cover the losses it suffered in the aftermath of the financial crisis.

Rumors of another reduction to the FHA’s MI premium have been further driven by the fact that the Obama Administration is nearing its conclusion. Would Obama make a move with only two weeks left in office?

Tobias Peter and Stephen Oliner of the American Enterprise Institute for International Housing Risk recently said a further MI premium cut by the FHA would be a “serious mistake,” particularly with the substantial increase to mortgage interest rates over the last two months. Peter and Oliner maintain that a further reduction to the MI premium would not help affordability, but would have the opposite effect.

“The higher mortgage rate, combined with house prices that have continued to rise briskly in many markets, will crimp affordability for first-time buyers,” Peter and Oliner wrote. “In addition, FHA announced in November that the capital position of its insurance fund stood above the congressionally mandated minimum level for the second year in a row, allowing the administration to argue that it has ample financial room to address a worsening affordability problem.”

FHA estimated two years ago at the time of the MI premium reduction that the move would allow approximately 250,000 new homebuyers to enter the market over the next three years. AEI estimates that only approximately 35,000 first-time homebuyers entered the market in 2015 after the premium reduction who could not have afforded to buy a house without the MI premium cut, which is less than half of the 83,000 per year (one-third of 250,000) FHA predicted.

About Author: Brian Honea

Brian Honea's writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master's degree from Amberton University in Garland.
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