Biden administration likely to cut FHA premiums despite credit risks

WASHINGTON — A little more than a week into President Biden’s term, mortgage industry experts and investors are already pricing in a long-awaited reduction in Federal Housing Administration mortgage premiums, but some say a significant cut could be risky.

The Department of Housing and Urban Development under former President Barack Obama had announced a scheduled 25-basis-point reduction in the FHA’s annual mortgage insurance premiums just before President Donald Trump took office. The Trump administration suspended that cut, leaving premiums untouched for four years. Most borrowers pay a premium of 0.85%.

But now, observers expect the Biden administration to follow through on that 25-basis-point cut and potentially go even further as the new president seeks to make housing more affordable and offer lower-income and minority families more paths to homeownership.

“Between the Biden administration’s belief that homeownership can be an important means for many lower-income and middle-class folks to build wealth, and the fact that the FHA program today is financially strong … leads me to believe that we’re going to see them take some quick steps to better serve that segment of the market,” said Brian Chappelle, a partner at Potomac Partners and a former FHA official.

The FHA said in November that the capital reserve ratio of its mutual mortgage insurance fund increased to 6.10% in the 2020 fiscal year, up from 4.84% a year earlier. The agency is required by law to maintain a buffer of at least 2% and in the past decade has approached that threshold several times.

The agency’s sound capital buffer “will provide cover for quick pricing changes once Biden administration personnel are in place,” Isaac Boltansky, director of policy research at Compass Point Research & Trading, said in a note to clients. Biden’s nominee for HUD secretary, Rep. Marcia Fudge, D-Ohio, is awaiting Senate confirmation, and the administration has yet to name an FHA commissioner.

Still, any reduction in mortgage insurance premiums at all could be risky as the U.S. continues to battle the coronavirus pandemic. In fact, former FHA Commissioner Dana Wade cited the uncertainty around the pandemic as the agency’s reason for not lowering premiums despite the robust capital metric in November.

The FHA’s borrowers, traditionally first-time homebuyers and largely minorities and lower-income earners, have been hit hard since the public health crisis began. More than 15% of the loans on the FHA’s book were classified as delinquent at the end of the third quarter, up from 8.2% a year earlier. The forbearance rate for Ginnie Mae loans, including FHA loans, was 7.83% as of Sept. 30, down slightly from April, early in the economic shock, according to the Mortgage Bankers Association.

That raises questions about the extent to which the FHA might need to dip into capital to cover any losses.

“On the premium, I think we better be careful not to get ahead of ourselves because you’ve still got a substantial delinquency rate in the FHA program, due to the huge number of families that are still in long-term forbearance,” said Ed DeMarco, president of the Housing Policy Council and former acting director of the Federal Housing Finance Agency.

Agency officials will also need to keep a close watch on when forbearance periods come to a close and how many borrowers will be able to resume making mortgage payments, said Dave Stevens, a former FHA commissioner who is now CEO of Mountain Lake Consulting.

“The forbearance numbers in the FHA program are the worst of any program in mortgages, and they’re concerning, and so the real question is going to be, how much risk can you take in considering a [mortgage insurance premium] reduction when you may need to draw down on your reserves?” he said.

In the eyes of some, a 25-basis-point cut could be largely symbolic, accomplishing a goal that the Obama administration was unable to carry out, Stevens said.

The expectation is generally that the Biden team will move to cut premiums 25 basis points fairly quickly, perhaps “in the first 100 days,” said Chappelle, followed by a larger reduction after the agency releases its annual report to Congress in November.

“There’s no real urgency to drop premiums,” said Stevens. “Rates are near historic lows, and I think that any initial drop would be more for political purposes, frankly. There’s no real need to stimulate the mortgage market.”

Still, others worry a significant premium cut could actually have unintended negative consequences for homebuyers in the FHA program. Ted Tozer, a senior fellow at the Milken Institute and a former president of Ginnie Mae, expressed concern that the lack of supply of affordable homes combined with a premium cut contribute to further increases in home prices.

“The borrowers I don’t think are going to really benefit much at all, just because I think it’s just going to work its way into the price of homes very, very quickly at the bottom end of the pricing structure,” Tozer said. “If everybody’s got … additional cash they can use, they’re going to use it, which means that the sellers are going to be the beneficiary because the consumers have more money to spend.”

Plus, reducing the premium could diminish the amount of money that the FHA and HUD take in and use for rental assistance and home counseling programs, according to Tozer.

Although that possibility is “reasonable,” Stevens said, the Biden administration could also undertake efforts to increase the supply of affordable housing, which is near record lows.

“The homebuilders, in particular, are not going to want to miss out on being able to utilize a larger pool of qualified buyers,” he said. “I think there’ll be motivations to build more homes … and with what the Biden administration will likely do to help create more opportunities to hire labor, and to perhaps pull tariffs off of things like lumber imports from Canada.”

For the Biden team, a premium cut could ultimately be looked at as a way to accomplish the president’s stated goals.

“If you’re a Biden regime and you’re thinking about housing policy, I don’t think [the possibility of higher home prices] is an excuse to not help first-time homebuyers, because they always get the short end of the stick,” Stevens said.

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