- Consumer Financial Protection Bureau report Credit Invisibles estimates that 19.4 million Americans will have difficulty accessing credit for lack of credit history. This trend is most pronounced in the young and in poor black and latin populations.
- The Department of Housing and Urban Development report Examination of Alternative FHA Mortgage Insurance Programs for Financing Single Family Rental and Small Multifamily Rental Properties considers, among other things, whether FHA should play a greater role in financing for small multifamily properties. Possible benefits include: a greater supply of affordable rental housing, a more diverse stock of rental housing and neighborhood stabilization benefits if better financing options spur investment in distressed properties.
Tag Archives: mortgage insurance
Monday’s Adjudication Roundup
- BofA has asked a PA federal judge to dismiss a class action RICO suit alleging kickbacks from overpriced mortgage insurance claiming it is the same suit that was dismissed as time-barred by Third Circuit in October.
- Deloitte is potentially facing $1.3 billion plus punitive damages to Freddie Mac for negligently auditing work for Taylor Bean, a mortgage lender with a massive employee fraud.
- Circuit split continues on whether and when lenders are responsible for development project failures when the Seventh Circuit ruled that the lender’s insurers would not cover the emergence of contractor liens in a failed $118 million real estate development.
Tuesday’s Regulatory & Legislative Round-Up
- HUD AWARDS $1.8 BILLION TO IMPROVE, PRESERVE NATION’S PUBLIC HOUSING Says Housing Authorities Will Use Funding to Maintain Housing for Families, Seniors
- Julián Castro: Secretary of U.S. Department of Housing and Urban Development (HUD) Positive About the FHA in Written Testimony before the House of Representatives Committee on Financial Services, Wednesday, February 11, 2015
Reiss on Drop in FHA Premium
Law360 quoted me in FHA Premium Cut Sets Up Fight Over Future Of Housing (behind a paywall). It reads in part,
President Barack Obama’s plan to lower premiums on Federal Housing Administration insurance has rekindled a battle with Republicans over the rehabilitation of the recently bailed out government mortgage insurer and the government’s role in the U.S. housing market more broadly.
Obama on Thursday officially laid out a plan that would see the FHA charge borrowers half a percentage point less on mortgage insurance premiums beginning this month in a move to boost affordability for the low- and middle-income borrowers who traditionally rely on FHA-backed mortgages.
The announcement came as the FHA continues to recover from a post-financial crisis shortfall that saw the long-standing program receive a $1.7 billion bailout from the U.S. Department of the Treasury in 2013, the first time the FHA has needed federal support.
Obama’s move on mortgage insurance premiums could make the road to a secure FHA take that much longer, and, coupled with earlier policy changes by the Federal Housing Finance Agency on mortgages backed by Fannie Mae and Freddie Mac, set up a renewed fight with Republicans over government support for the housing market.
“What’s at stake is not just housing prices and mortgage rates,” Brooklyn Law School professor David Reiss said. “What’s implicit of all of this is: What’s the appropriate role of the government in the housing market?”
The president’s plan would see the FHA charge borrowers 0.85 percent annual premiums on their mortgage insurance, down from the 1.35 percent they currently pay. First-time homebuyers will see a $900 drop in their mortgage payments each year under the new policy, according to a fact sheet released Wednesday by the White House.
“It’ll help make owning a home more affordable for millions” around the country, Obama said in a speech in Phoenix on Thursday.
Housing analysts said that the move could help boost the housing market at the margins but would not entice a large number of first-time buyers to get into the housing market.
The lower mortgage insurance premium will prove to be “marginally beneficial for the average borrower, in our opinion, and consequently, we do not believe this news … is a catalyst for higher housing demand and higher earnings estimates,” Sterne Agee analyst Jay McCanless said in a note Thursday.
But what the rate cut does is put in clear relief Obama’s plan to boost the housing market and provide a strong government role in that key economic sector, even if it means potentially putting added pressure on the agencies that provide government assistance to the housing market. Those agencies include the FHA as well as the Federal Housing Finance Agency and the two failed mortgage giants over which it has authority, Fannie Mae and Freddie Mac.
“The tension is between financial responsibility and public policy about housing,” Reiss said.
In the FHA’s case, lowering the mortgage insurance premium is likely to increase the amount of time that the agency will need to get to a 2 percent capital level that is mandated by Congress.
An independent audit of the FHA’s finances released late last year found that the agency’s Mutual Mortgage Insurance Fund stood at a positive $4.8 billion as of the end of September after being as much as $16.3 billion in the hole in 2012.
Still, while the gain on the fund has been real, its capital ratio stood at only 0.41 percent in that period, far lower than the mandated 2 percent.
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Obama had backed congressional efforts to eliminate Fannie Mae and Freddie Mac and boost private capital in the mortgage market, but they failed amid disagreements between the Senate and House Republicans. The issue is now largely dormant.
That has left a vacuum for Obama to fill, Reiss said.
“Because Congress refused to act, Republicans are going to be stuck with a more activist government because they refused to come to the table and put together a proposal that can pass,” he said.
FHA’s Financial Health Looking Up
HUD has released the Annual Report to Congress Regarding the Financial Status of the Mutual Mortgage Insurance Fund Fiscal Year 2014. It appears that things are looking up for the FHA, particularly after last year’s mandatory appropriation from the Treasury, the first in the FHA’s 80 year history. For those of you who are not housing finance nerds, the Mutual Mortgage Insurance Fund (MMIF) is the financial backbone of the FHA’s single-family mortgage insurance program. When it is in bad shape, the FHA is in bad shape.
As Secretary Castro notes in his forward to the report,
The value of the Fund has improved significantly, now standing at $4.8 billion. The increased economic value represents a capital reserve ratio of 0.41. This improvement shows tremendous progress, especially considering that the Fund had a negative value of $16.3 billion just two years ago. The two-year gain in Fund value is an impressive $21 billion. The performance of the portfolio has improved dramatically in a short period of time. Foreclosures are down 68 percent since the height of the crisis and recoveries to the Fund have improved 68 percent from their lowest level–saving billions of dollars. While FHA must still respond to challenges presented by legacy books and market volatility, the independent actuary’s report demonstrates that FHA is firmly on the right track and is projected to continue improving. (1)
The MMIF is supposed to have a capital reserve ratio of 2 percent, so the FHA is still quite a bit away from receiving a clean bill of health. But according to projections, it should achieve that level in 2016 and then continue to improve from there. (35, Ex. II-3)
While this is all pretty abstract, there are some pretty concrete aspects to the health of the MMIF. The size of FHA premiums, paid by homeowners borrowing FHA-insured mortgages, is set in the context of the health of the MMIF because the FHA is a self-funded government agency. So low reserves means that it is harder to cut premiums. Higher FHA premiums mean that mortgages are more expensive for the low- and moderate income borrowers who make up a large part of the FHA’s book of business. So the health of the MMIF is an indicator of sorts of the health of the housing market overall.
Reiss on Easing Credit
Law360 quoted me in With Lessons Learned, FHFA Lets Mortgage Giants Ease Credit (behind a paywall). It reads in part,
The Federal Housing Finance Agency’s plan to boost mortgage lending by allowing Fannie Mae and Freddie Mac to purchase loans with 3 percent down payments may stir housing bubble memories, but experts say better underwriting standards and other protections should prevent the worst subprime lending practices from returning.
FHFA Director Mel Watt on Monday said that his agency would lower the down payment requirement for borrowers to receive the government-sponsored enterprises’ support in a bid to get more first-time and lower-income borrowers access to mortgage credit and into their own homes.
However, unlike the experience of the housing bubble years — where subprime lenders engaged in shoddy and in some cases fraudulent underwriting practices and borrowers took on more home than they could afford — the lower down payment requirements would be accompanied by tighter underwriting and risk-sharing standards, Watt said.
“Through these revised guidelines, we believe that the enterprises will be able to responsibly serve a targeted segment of creditworthy borrowers with lower down payment mortgages by taking into account ‘compensating factors,’” Watt said at the Mortgage Bankers Association’s annual meeting in Las Vegas, according to prepared remarks.
* * *
The realities of the modern mortgage market, and the new rules that are overseeing it, should prevent the lower down payment requirements from leading to Fannie Mae, Freddie Mac, and by extension taxpayers taking on undue risk, Brooklyn Law School professor David Reiss said.
Tighter underwriting requirements such as the Consumer Financial Protection Bureau’s qualified mortgage standard and ability to repay rules have made it less likely that people are taking on loans that they cannot afford, he said.
Prior to the crisis, many subprime mortgages had the toxic mix of low credit scores, low down payments and low documentation of the ability to repay, Reiss said.
“If you don’t have too many of those characteristics, there is evidence that loans are sustainable” even with a lower down payment, he said.
The FHFA is also pushing for private actors to take on more mortgage credit risk as a way to shrink Fannie Mae and Freddie Mac. There is a very good chance that private mortgage insurers could step in to take on the additional risks to the system from lower down payments, rather than taxpayers, Platt said.
“You’ll need a mortgage insurer to agree to those lower down payment requirements because they’re going to have to bear the risk of that loss,” he said.
The 97 percent loan-to-value ratio that the FHFA will allow for Fannie Mae and Freddie Mac backing is not significantly higher than the 95 percent that is currently in place, Platt said.
Having the additional risk fall to insurers could mean that the system can handle that additional risk, particularly with the FHFA looking to increase capital requirements for mortgage insurers, Reiss said.
“It could be that the whole system is capitalized enough to take this risk,” he said.
Housing Finance at A Glance
The Urban Institute’s Housing Finance Policy Center really does give a a nice overview of the American housing finance system in its monthly chartbook, Housing Finance at A Glance. I list below a few of the charts that I found particularly informative, but I recommend that you take a look at the whole chartbook if you want to get a good sense of what it has to offer:
- First Lien Origination Volume and Share (reflecting market share of Bank portfolio; PLS securitization; FHA/VA securitization; an GSE securitization)
- Mortgage Origination Product Type (by Fixed-rate 30-year mortgage; Fixed-rate 15-year mortgage; Adjustable-rate mortgage; Other)
- Securitization Volume and Composition (by Agency and Non-Agency Share of Residential MBS Issuance)
- National Housing Affordability Over Time
- Mortgage Insurance Activity (by VA, FHA, Total private primary MI)
As with the blind men and the elephant, It is hard for individuals to get their hands around the entirety of the housing finance system. This chartbook makes you feel like you got a glimpse of it though, at least a fleeting one.
