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FHA’s Premium Cut is Good News for HFAs

cutting-moneyReaction has been mixed in the days following the Federal Housing Administration’s announcement that it will lower mortgage insurance premiums by 25 basis points for new FHA-insured loans that close on or after January 27.

The reduction of the mortgage insurance premium—the first by the FHA in two years—is intended to save existing homeowners money and make it cheaper for first-time buyers to secure a loan. FHA estimates it will save homeowners with FHA-backed loans approximately $500 per year.

One group that stands to benefit from the reduction in FHA mortgage insurance premiums is housing finance agencies (HFAs), according to Moody’s Investor Service. The reduction will make it easier for borrowers to obtain FHA-insured loans and will result in an increase in HFA originations, according to the Weekly Credit Outlook from Moody’s for the week of January 12.

“HFAs are charged with providing and increasing the supply of affordable housing in their respective states for first-time homebuyers,” wrote Ferdinand S. Perrault, VP—Senior Analyst with Moody’s. “The FHA, unlike other mortgage insurance providers, insure loans with loan-to-value ratios of up to 97 percent, which is key to the HFA lending base, given that first-time homebuyers often have limited funds for down payments.”

The reduction in mortgage insurance premiums is expected to make HFA products more competitive, since it will draw in more borrowers and result in stronger originations of FHA-backed loans, Perrault said—which is particular meaningful at a time when mortgage rates are rising, although they have declined by 20 basis points in the last two weeks, the average 30-year FRM is still at 4.12 percent).

FHA mortgage insurance comprises approximately 38 percent of HFA whole-loan mortgage rated by Moody’s while private mortgage insurance backs just 17 percent of those loans, according to Moody’s.

“HFA portfolio performance will strengthen because more loans will benefit from FHA insurance coverage,” Perrault said. “Additionally, the FHA provides the strongest claims-paying ability relative to private mortgage insurers. Although private mortgage insurers maintain ratings of Baa1 to Ba1, FHA insurance is backed by the US government.”

Click here to view the complete report from Moody’s.

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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