For the first time in two years, the Federal Housing Administration (FHA) has lowered its annual mortgage insurance premiums paid by most borrowers in an effort to expand homeownership and save money for existing borrowers, according to an announcement from FHA on Monday.
FHA reduced the mortgage insurance premium by 25 basis points for most new mortgages with a closing or disbursement date on or after January 27, 2017.
It has been widely speculated in the industry recently that the Obama Administration would reduce the premiums one last time as it nears its final days and the current HUD leadership’s days appear to be numbered.
As the Obama Administration sought to reduce risk in the market in the aftermath of the financial crisis, the FHA raised its mortgage insurance premiums several times in an effort to stabilize its Mutual Mortgage Insurance (MMI) Fund. The result was higher capital reserves for the Fund but increased credit costs to qualified borrowers.
The FHA last reduced its mortgage insurance premiums in January 2015. At that time, the reduction was 50 basis points. The move drew some heavy criticism because at the time, the MMI Fund’s capital ratio was at 0.41 percent, less than one-quarter of the Congressionally-mandated 2 percent threshold. Since 2012, however, the fund has gained $44 billion in value and is now at 2.32 percent, above the level required by Congress.
With the MMIF at an economically healthy level and borrowers facing higher mortgage rates in the coming year, HUD Secretary Julián Castro said he believes that this was the right time to reduce mortgage insurance premiums again.
“After four straight years of growth and with sufficient reserves on hand to meet future claims, it’s time for FHA to pass along some modest savings to working families,” Castro said. “This is a fiscally responsible measure to price our mortgage insurance in a way that protects our insurance fund while preserving the dream of homeownership for credit-qualified borrowers.”
The reduction announced on Monday takes insurance premium levels back down to near pre-crisis levels, according to FHA. The move is expected to save homeowners with FHA-insured mortgages approximately $500 per year. FHA predicts that the reduction will lower the cost of housing for approximately 1 million borrowers who are expected to use FHA-insured financing to either buy a home or refinance a mortgage over the next year.
“We’ve carefully weighed the risks associated with lower premiums with our historic mission to provide safe and sustainable mortgage financing to responsible homebuyers,” said Ed Golding, Principal Deputy Assistant Secretary for HUD’s Office of Housing. “Homeownership is the way most middle class Americans build wealth and achieve financial security for themselves and their families. This conservative reduction in our premium rates is an appropriate measure to support them on their path to the American dream.”
The National Association of Realtors (NAR) praised the FHA's decision to lower mortgage insurance premiums.
“FHA mortgage products exist to serve an important mission: providing homeownership opportunities to creditworthy borrowers who are overlooked by conventional lenders,” said NAR President William E. Brown. “The high cost of mortgage insurance has unfortunately put those opportunities out of reach for many young, first-time- and lower-income borrowers. Now, we have a real opportunity to get back on track.”
Brown continued, “This is a question of simple math. Every time we cut the cost of mortgage insurance it means more borrowers meet the debt-to-income ratio required to purchase a home. It follows that dropping mortgage insurance premiums today will mean a whole lot more responsible borrowers are suddenly eligible to purchase a home through FHA. That puts more money in the fund to protect taxpayers, and it puts more families in homes so they can live out the American dream.”
Click here to read FHA’s mortgagee letter, which includes a full schedule of the new mortgage insurance premium rates.