WASHINGTON — The Federal Housing Administration's lower insurance premium — already credited with boosting refinancing and purchase loans — is now seen as giving the agency a possible advantage over competitors in attracting first-time buyers and others with low credit scores.
The FHA endorsed nearly 80,000 purchase mortgages in June, an almost 116% rise from February. The uptick is attributed to the 50-basis point drop in its insurance premium — to 1.35% — in January. But lenders also point to the pricing reduction as drawing first time buyers and others with low credit scores. As purchase loans have grown overall, the percentage of FHA loans to new homeowners has remained constant at around 82%.
Observers said the lower FHA pricing combined with other factors may be giving the agency an edge over the mortgage giants Fannie Mae and Freddie Mac when it comes to borrowers with credit scores below 720.
"If you have a credit score above 720, you want to go conventional. Otherwise, the borrower will go with FHA," said Richard Green, a sales manager at Presidential Mortgage Group in Bethesda, Md., and past president of the Maryland Mortgage Bankers Association. He added that the growth in FHA loans for first-time buyers "really started to kick off when they reduced the annual premium."
Although the FHA requires a down payment of 3.5% and is still charging higher-than-normal premiums to rebuild reserves, the agency still does not charge extra fees — known as "loan level price adjustments" — that Fannie and Freddie charge borrowers with low credit scores.
Growth in the FHA's portfolio has made it competitive with Fannie and Freddie in terms of overall purchase loans. In the second quarter, the FHA endorsed 198,800 purchase mortgage loans, compared with 172,000 purchase mortgages acquired by Freddie and 229,000 purchase mortgages acquired by Fannie.
While the premium reduction was seen as a way to expand the FHA's reach into the mortgage market and was expected to generate a refinancing wave, the magnitude of the growth in the agency's portfolio has caught some off guard. FHA endorsements of single-family loans — including home purchases and refinancing — totaled 128,495 in June, an 85% jump from the monthly total in June 2014.
"If you asked any housing or mortgage banking expert a year ago if they saw FHA volume doubling, I don't think anyone would have said yes," said Bill Cosgrove, the owner of Union Home Mortgage in Strongsville, Ohio, who chairs the national Mortgage Bankers Association.
Bob Walters, the chief economist for Quicken Loans, the largest FHA lender, said the typical kind of mortgage contributing to the agency's growth is one that fits the profile of first-time buyers. The average purchase price is around $160,000 to $170,000, the average loan-to-value ratio is 95% and the average FICO score is 670.
"This is the first-time homebuyer, this is move up buyers. This is low- to moderate-income buyers," Walters said.
But he noted that the FHA's premium reduction is not the only factor contributing to the jump in home purchase activity.
"We are also seeing a good old-fashioned resurgence in the housing market," Walters said.
Others pointed to developments besides the premium reduction leading to higher demand, including the potential that homeownership is simply looking attractive again to new buyers.
"It is a sign that the first-time homebuyer is coming back into the market," said Cosgrove.
In addition, renters who may have owned a home five or six years ago, but got into trouble, are starting to re-enter the market, he added.
"In talking to loan officers, it seems borrowers with spottier past credit are now looking to get out of renting and into homeownership. That might be driving it a little bit," Cosgrove said.
But the premium reduction definitely expands the pool of borrowers who can qualify for an FHA loan because it lowers monthly payments, according to Faramarz Moeen-Ziai, senior vice president for national sales and production at Commerce Home Mortgage in San Ramon, Calif. Some borrowers "gravitate towards the FHA products because they don't qualify for conventional loans," he said.
Commerce Home Mortgage has seen its FHA volume increase in non-urban markets like Ft. Collins, Colo., and Fresno, Calif., not in urban areas. CHM does wholesale lending in 11 states, but the bulk of its originations come from its retail operations in Arizona, California, Colorado and Florida.
FHA's decision to reduce the mortgage insurance premium coincided with a drop in interest rates and it opened the door for a flood of FHA streamline refinancings, according to Moeen-Ziai.
"We were able to take a lot of our borrowers and drop their overall payment over the course of February, March and April. That is the big thrust that we saw," Moeen-Ziai said.
