Did President Obama act too hastily in lowering the FHA Mortgage Insurance Premiums? According to an editorial in the Washington Post the FHA MI premiums should not have been reduced as the FHA has not restored completely its capital reserve, and as recently as September, 2013, FHA had to take a bailout of $1.7 billion from the federal governement to cover losses incurred as a result of "overly aggressive policies prior to the 'Great 
Recession'".
While the FHA has been working to restore its capital reserves, the reserves stand at approximately 0.41% of the value of its portfolio as of the end of 2014. By law, FHA is to retain reserves equal to 2.0% of the value of its portfolio. And, the FHA acting Director, Biniam Gebre, attributed the FHA's return to a solvent position to the significant increases in the premiums that it charges to borrowers. After the President rteduced the FHA premiums, HUD Secretary Julian Castro indicated that the reduction of the premiums will delay the complete restoration of FHA capital reserves "only by a few months".
The conclusion of the editorial raises the question of why this addiotional risk is necessary in light of several factors, to-wit: (1) that the savings to borrowers will be minimal; (2) homebuyers are currently the beneificiaries of record-low interest rates; and (3) consumers are getting a windfall from lower gas prices. The editorial urges the administration to reconsider the reduction before it takes effect and questions whether the administration has learned a "key" lesson from the Great Recession, being, "Finance in general, and mortgage finance in particular, is riskier than it sometimes seems, and the best protection against those risks is a solid core of capital.
I must admit that the FHA is between a rock and a hard place with the competitive pressure that is coming to bear from the GSEs with their low down payment products and the overall increased competitive atmosphere in the mortgage industry. FHA can lower its premiums, take on more risk and remain competitive, or FHA can maintain the high premium levels that have been in place for several years and price itself out of the market it was intended to serve. Perhaps FHA will have to work a little harder to manage its risks, but I think the lower premiums are overdue.
Image courtesy of Washington Post/Saul Loeb/AFP/Getty Images
