When FHA announced its reduction in the annual mortgage insurance premiums, it was said to be done to assist additional first-time home buyers and low to moderate income consumers buy homes.
According to recent research, done by a Washington, DC think-tank, the American Action Forum, that ain’t the case. (Lower Premiums)
The results, so far, indicate that what it has done is to drive more high credit score, higher balance loans to FHA, away from the traditional conventional loan providers. To some extent, this is good news for FHA (obviously bad news for conventional lenders).
The fear when FHA cut the premium rate was that this might open them up to the insuring of more loans for higher risk first time buyers who were having some difficulty qualifying for loans at the higher annual premiums. This risk, coupled with an already depleted mortgage insurance fund, posed a potential disaster for the mortgage and housing markets. Too many defaults could cripple the fund and put the continuation of the FHA insurance program in jeopardy. Can we afford to lose the FHA program?
The increase in credit scores and lending to more repeat homebuyers may help put FHA on more stable ground, as they hold steady on their exposure to the riskier first time and low to moderate income home buyers. The question is, will it help to replenish the insurance fund? The thought was that it would be another benefit of the premium cut through more loans at the lower premium. Will the increase in loans with higher balance make up the difference? That remains to be seen.
The one thing that may help is the credit profile of the borrowers for the loans currently being insured. If these loans have been properly underwritten, then maybe they will perform much better, reduce defaults and claims, and put less strain on the insurance fund. If not, the fear is that as these are higher balance loans and any related loss from defaults will actually put a greater drain on the fund. Not good for FHA, the industry or consumers. We need FHA in the mix but at the right level.
FHA was created to assist those home buyers who had difficulty obtaining home financing through traditional lending channels. Its target audience is the first time home buyer and those of low to moderate incomes. They should supplement not compete with the conventional market.
Two things:
- Lenders need to ensure that the FHA loans originated today are done carefully. Borrowers must have the ability to repay the loan AND maintain the home. Income and assets must be properly verified with no shortcuts to a loan approval. Quality and compliance must be paramount in the lender’s mission plan.
- We still need to develop loan programs to assist the first time home buyers. Without these buyers, the repeat buyers will dwindle, leaving a broken housing market, a declining economy and less business for everyone. Maybe, all these think tanks can help in this area.
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For every action, there is an opposite and equal reaction. Reduce the costs; increase the business. Is the increased business worth the risk? Only time will tell.