FHA's strong capital levels should end life-of-loan rule

While the Federal Housing Administration's insurance fund capital ratio improved during fiscal year 2024, the delinquency rate has also increased, the annual report from the Department of Housing and Urban Development said.

The Mutual Mortgage Insurance Fund's capital ratio was 11.47% as of Sept. 30, which was the end of the federal fiscal year. It was an increase of 96 basis points from the end of fiscal year 2023, when the ratio was 10.51%.

This turns around a decrease in the capital ratio last year; at the end of fiscal year 2022, the ratio was 11.11%.

The stand-alone capital ratio of the forward mortgage portfolio stood at 10.88%, while for the reverse mortgage program it was 24.5%.

"Through our work, we have demonstrated that FHA can facilitate homeownership and wealth-building opportunities for hundreds of thousands of households and provide support for homeowners facing hardships while maintaining a financially sound Mutual Mortgage Insurance Fund," Federal Housing Commissioner Julia Gordon said in a press release.

The MMIF has $173 billion in capital, a $27.5 billion increase from fiscal year 2023.

Growth in home price appreciation helped to drive the MMIF's performance, but going forward that is expected to level off.

Another driver of change in the capital ratio, and the majority of MMI Fund capital, is growth of its capital resources, currently 8.29% of the FHA's insurance in force. Those are composed of collected upfront and monthly insurance premiums, investments, recoveries on disposed assets, and any notes and properties awaiting disposition

The Community Home Lenders of America lauded the Fund's "strong performance" but also saw it as an opportunity for additional changes to FHA policy.

"In particular, CHLA believes the FHA report demonstrates the effectiveness of the February 2023 cut of 30 basis points in annual FHA premiums, and we reiterate our call for FHA to find a way to end life of loan premiums, which currently overcharge borrowers," a statement from the organization said.

Similarly, the Mortgage Bankers Association noted that the current ratio is more than five times the statutory minimum for the MMIF.

"While it is sensible to have a healthy cushion above the 2% minimum reserve, qualified borrowers should not be charged higher mortgage insurance premiums than necessary," a statement from President and CEO Bob Broeksmit said. "In addition to pursuing more program enhancements to boost housing supply and affordability, such as this year's 203(k) program updates, borrowers would see meaningful payment relief from FHA eliminating its life of loan premium requirement and making another reasonable cut to the MIP."

Approximately 1.156 million borrowers saved an average of $453 annually as a result of the mortgage insurance premium reduction, for a total savings of more than $828 million from March 2023 through the end of the fiscal year 2024. "Over the average loan life of 9.8 years, the forecasted total savings would be $5.1 billion," the report said.

During the fiscal year, which ended on Sept. 30, the FHA insurance program served 766,942 forward mortgage borrowers. That included 603,040 purchase borrowers, over 82% of those were first-time home buyers, along with 242,796 borrowers who identified as people of color. FHA also insured 26,501 Home Equity Conversion Mortgages.

In recent years, the private mortgage insurance industry has had little overlap in customers with the FHA program. Although in the run-up to the premium cut in 2023 along with Federal Housing Finance Agency changes to the loan level pricing adjustments, it was debated how many conforming borrowers could migrate back to FHA.

The U.S. Mortgage Insurers argued the FHA has a countercyclical role and needs to remain well-capitalized, while private capital stands in a first-loss position for low down payment loans backed by private MI.

"As such, policymakers should ensure that there is a consistent, transparent, and coordinated approach to housing policy, so that private capital can protect against credit risk ahead of taxpayers whenever possible," Seth Appleton, USMI president, said in a statement. "This approach would enable FHA to focus on its mission of supporting borrowers who do not have access to traditional financing and ensure that it can play its countercyclical role under all economic conditions."

The seriously delinquent share of FHA borrowers was 4.15% as of September. This was a slight increase from a year ago but consistent with rates seen prior to the COVID-19 pandemic, the report said.