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How Will Insurance Rate Reductions Impact Mortgage Affordability?

Since 2015, FHA mortgage loans have been more attractive than private or GSE loans for borrowers. But that might be changing according to a recent report by the Housing Finance Policy Center (HFPC) of the Urban Institute [1]. According to the April Housing Finance At A Glance Chartbook by the institute Private Mortgage Insurance (PMI) companies are joining the race to cut insurance premiums that will likely offset the attractiveness of loans offered by FHA.

The report indicated that the April 2016 reduction in PMI rates for borrowers with higher FICO scores and reduction by companies like the Mortgage Guaranty Insurance Corp (MGIC) in 2018 for borrowers with lower credit scores are likely to give stiff competition to FHA rates.

Giving an example, the report said that a borrower putting 3.5 percent down payment would now find FHA more economical except for those with FICO scores of 720 or higher. It found that with premium reductions by PMI companies on the way, this breakeven FICO would move lower as the rates for PMI became more attractive than FHA, for borrowers with a higher credit score.

“As a result, there will be a shift in the market share as FHA loses many 720 to 740 FICO borrowers to PMI, although FHA’s share will likely stay within the historical range of 10 to 15 percent of total originations,” the report said. “Because these are also the most creditworthy borrowers for the FHA, their loss would increase the share of lower quality loans in the FHA’s book of business.”

The HFPC report, which provides a snapshot of monthly mortgage and housing market data, also compared the performance of banks to nonbanks and mortgage credit availability. The data indicated that nonbanks were more accommodating than banks as the median debt-to-income level for mortgages issued by them continued to increase in March. The debt-to-income ratios for banks stayed flat during this period.

It also became slightly easier for borrowers to get a mortgage during the month with the HFPC’s housing credit availability index indicating that credit availability expanded to 5.8 percent in the fourth quarter of 2017, the highest level since 2013. This increase was mainly driven by the credit expansions within both the GSE and government channels, thanks to higher interest rates and lower refinance volumes.

Click here [2] to read the full report.