FHA Defends Decision to Lower Fees to Buyers

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Daily Real Estate News | Thursday, February 12,


Federal Housing Administration officials stressed to lawmakers on Wednesday that the agency is not putting its finances at risk by its recent move to reduce the insurance fees it charges home buyers when it still hasn’t met its mandated capital ratio funds rate.

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Housing and Urban Development Secretary Julian Castro, who oversees FHA, told lawmakers of the House Representatives Financial Services Committee Wednesday that FHA’s actions “maintain a careful balance between strengthening our fund and advancing our mission. It simply isn’t right to unduly burden borrowers in the present because of the misbehavior of others in the past.”

Effective Jan. 26, FHA lowered its annual mortgage insurance premiums by half a percentage point from 1.35 percent to 0.85 percent. The move is expected to save an average borrower $900 annually.

The National Association of REALTORS® has applauded FHA’s move to make its loans more affordable to home buyers.

“The Federal Housing Administration’s new prices encourage sustainable home ownership for creditworthy borrowers,” NAR President Chris Polychron said in a statement following the committee meeting. “FHA is not lowering its underwriting standards or luring irresponsible borrowers into home ownership, instead it is resetting its fees to appropriately balance anticipated risk while still making a profit to support its funds.”

Polychron notes that after the agency posted four years of increases, FHA’s fees had become so pricey that about 234,000 creditworthy borrowers were priced out of the housing market alone due to the increases. The percent share of first-time buyers using FHA-backed loans plummeted from 56 percent to 39 percent. Meanwhile, the share of first-time home buyers fell to the lowest level in nearly three decades, according to NAR data.

But the FHA continues to draw some criticism over its move to lower insurance premiums, with critics arguing that the FHA is promoting lending to riskier borrowers at a time when the agency can’t afford it. In 2013, FHA required $1.7 billion in taxpayer funds due to a high number of defaults during the aftermath of the housing crisis.

FHA only recently returned to profit when it raised its mortgage insurance premiums. But its mortgage insurance fund’s capital ratio stands at 0.41 percent, which is still below its legal 2 percent requirement. The FHA maintains that it will reach its legal minimum in 2016. 

The FHA has argued that it’s move to open the credit box will help it bring in more borrowers to help increase its profits. Indeed, NAR research estimates show that the reduction in premiums could “price-in” an additional 1.6 million to 2.1 million renters, along with many trade-up buyers – resulting in 90,000 to 140,000 additional annual home purchases.

“FHA’s new pricing is not going to magically bring all of the missing millennials to the closing table, but they, and the housing market, will certainly benefit from the reduction,” Polychron said in a stament.

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