FHA premium cut still may not happen after Montgomery is confirmed

WASHINGTON — Brian Montgomery seems well on his way to being confirmed to serve a second stint as the Federal Housing Administration commissioner.

But once he gets to the FHA, Montgomery may find it more difficult to be as innovative under the Trump administration as he was when he was commissioner under President George W. Bush — particularly when it comes to reducing mortgage insurance premiums on FHA single-family forward loans.

Montgomery supported risk-based MI premiums when he first served as FHA commissioner and implemented risk-based premiums in July 2008 during the housing market crash. But it had a short life. Congress placed a one-year moratorium on risk-based premiums starting Oct. 1, 2008, as part of the Housing and Economic Recovery Act. Shortly after the risk-based pricing ban was passed, the FHA raised MI premiums.

"Assuming Montgomery is confirmed by the Senate, he will take a more knowledgeable approach to setting FHA premiums," according to Basil Petrou, managing partner at Federal Financial Analytics in Washington.

"He may adjust the premium, but it is not going to be a simple one-time cut in the premium. It could be a tailored premium with a risk-based element," Petrou said in an interview.

However, Montgomery may not have much flexibility under the Trump administration to do that, said Isaac Boltansky, a Washington policy analyst at Compass Point.

Boltansky expects Montgomery will be confirmed by the full Senate, but he doubts the FHA will be allowed to expand its market share at the expense of private insurers under the Trump administration. "And we firmly believe there will be an internal push to curtail the FHA's market share," Boltansky wrote in a Nov. 28 report.

The Senate Banking Committee voted 18-5 to advance Montgomery's nomination to the full Senate this week. If he is confirmed, FHA lenders and real estate professionals are hopeful his past experience will allow Montgomery to hit the group running, even as the demands of the job are much different this time around.

"Montgomery did a very solid job" during his first tour as the FHA commissioner from 2005-2009, said Scott Olson, executive director of the Community Home Lenders Association.

"He was well respected and kept the FHA out of hot water" before the housing crash, Olson said. The FHA didn't jump to preserve market share when subprime lenders "went off the deep end" in relaxing credit standards, Olson noted in an interview.

"Today, the FHA forward single-family loan program is very strong," Olson said. And community lenders want Montgomery to reduce the 85-basis-point annual premium in FHA loans and re-examine the life of loan premium, despite the recent drop in the FHA's capital ratio, which is largely due to losses in the FHA's reverse mortgage program.

Under the current rate structure, forward mortgage borrowers have to pay the 85-basis-point annual premium for the life of an FHA loan. This policy is prompting many FHA borrowers to refinance with private mortgage insurers once they reach an 80% loan-to-value ratio.

Still, the National Association of Realtors will be urging Montgomery to reduce FHA premiums and finalize condominium rules that were proposed by the Obama administration.

"With the homeownership rate still at a 50-year low, we need to have affordably priced homes available for ownership and condominiums certainly provide that," according to NAR chief economist Lawrence Yun.

"Relaxing rules on commercial space and owner-occupancy ratios will greatly help," Yun said in an interview. The FHA currently requires a 50% owner-occupancy rate in most apartment buildings before the agency will finance the purchase of a condo unit.

Lowering the occupancy rate would allow more multifamily units to qualify for FHA condo financing.