HUD increased mortgage insurance premiums (MIP) and certain term limits for holding mortgage insurance as of June 3 of this year, in order to ensure the long-term solvency of its mortgage insurance fund.
Peter Milewski, director of homeownership lending at MassHousing (also director of the Mass Mortgage Insurance Fund, a fully contained business line within MassHousing), says the FHA has steadily been increasing rates across the board for all its borrowers, with the higher-FICO borrowers in effect subsidizing the lower-FICO borrowers.
FHA loans have long been the loan of choice for qualified borrowers who have less than 20 percent for a down payment. Their one-size-fits-all criteria does not take into account differences in FICO scores, as is increasingly done in the private market.
The private mortgage insurance (PMI) market is doing the opposite – stratifying the rates so that the best-qualified borrowers get the lowest rates, and vice versa. This, says Milewski, is drawing the higher-qualified borrowers away from conventional FHA loans in search of lower borrowing costs in the private market.
MassHousing tailors its programs to enable qualified prepared homebuyers to participate. Milewski cites its low delinquency rate – a third of the delinquency rate for FHA and half of the delinquency rate of the private mortgage industry.
‘Fairly Homogeneous’
“Risk-based pricing to a certain level makes sense, but we think that our borrowers of low to moderate income, with good but not great credit, and ability to pay, are fairly homogeneous. We don’t feel that a process that creates stratified pricing is necessary,” Milewski says.
Mike Kemple is Northeast regional manager of Sierra Pacific Mortgage, which has an office in Braintree. He notes in an email that private mortgage insurers have been closely monitoring changes in FHA qualifying and MIP for a number of years, and their on-line calculator tools measure differences in payments across typically four to six different PMI plan options and FHA. Each case is different, with some loans offering lower monthly payments through PMI while others have lower payments through FHA despite the increased premiums.
While the FHA has been struggling with potential insolvency of its mortgage insurance fund, PMI companies are making significant profits for the first time in six years, Kemple says. “So we are seeing lower rates, broader options [for low down payments] and more predictable underwriting than at any time in the last six years.”
Kemple notes that MassHousing and the USDA’s Rural Housing loan program, in significant parts of the state, have become competitive alternatives to FHA. But, he says, while higher MIP on FHA mortgages make them more expensive for low down-payment borrowers who lack conventional loan options, the FHA will still remain their most significant and available option.
“There is a political intention in Washington to reduce the role of Fannie and Freddie, reducing the role of government subsidization of the market,” Milewski says. “This might be a deliberate attempt to provide a political solution to the shrinking of the FHA footprint.”
Kemple concurs. “HUD has been criticized for issuing insurance at unsustainably low rates and credit requirements until very recently,” he says. “Insolvency of the FHA Insurance Fund has been a concern among politicians for years. Regardless of whether or not the increase in premiums is appropriate or an over-correction, there’s no question that premium increases were necessary to stabilize the fund and the future of FHA financing. HUD has also been very clear that it did not expect to be the source of 50 percent of [the nation’s] home purchase financing, and is pleased with a diminishing share of the overall market.”
Ironically, a damper to this may come from the Consumer Financial Protection Bureau. Its Qualified Mortgage (QM) rule, effective Jan. 10, 2014, will limit lender willingness or ability to originate mortgages that are outside of Fannie/Freddie, FHA, VA or USDA guidelines.
It’s too hard to predict the ultimate effects of increased FHA borrowing costs, Kemple says. “It certainly means that fewer borrowers qualify for FHA financing, but the rapid increase in mortgage rates has a similar effect,” he said.
Email: coneill@thewarrengroup.com
