HUD Has No Plans to Lower Insurance Premiums Despite FHA Loan Boom

October 27, 2015 No Comments »
HUD Has No Plans to Lower Insurance Premiums Despite FHA Loan Boom

The past year has been good for the Federal Housing Administration (FHA).

The government agency reportedly provided insurance for more than $200 billion in mortgage loans during fiscal year 2015, which ended just last month on September 30th.

That’s nearly double the $134 billion in FHA loans endorsed in fiscal year 2014, thanks mostly to that cut in mortgage insurance premiums, which lowered the annual MIP FHA borrowers pay by 50 basis points.

So homeowners who had been paying anywhere from 1.30% to 1.35% of the loan amount only had to pay .80% or .85%.

The catch is that MIP is now typically in force for the life of the FHA loan, as opposed to falling off after just a handful of years, something refinancers should watch out for.

But most homeowners don’t seem to care, seeing that they don’t actually know that rule, or simply because they won’t hold the loan anywhere close to maturation.

In any case, the move has done wonders for the FHA and boosted its ailing capital reserve ratio, meaning they could potentially make new FHA loans even cheaper going forward.

There was speculation that the agency would cut insurance premiums again despite the recent cut in January, but that seems to be nothing more than conjecture.

No Plans for Another Cut

During an online town hall event at George Washington University in Washington, DC, HUD secretary Julián Castro told the crowd it wasn’t going to happen.

Host Nick Timiraos, who writes for the WSJ, asked when we might see another decrease in the premiums again. Specifically, he wondered what would prompt such a move.

Castro had a huge grin on his face and replied that it was a “good question,” but quickly noted that the premiums were just lowered in January.

He followed by adding that “we’re always gonna be sensitive to ensure that we’re pricing according to risk,” and that the recent move came after five increases to the MIP.

That cut made sense according to the numbers and the actuarial review.

The HUD’s 2015 report isn’t back yet, but with increased FHA loan volume the capital reserve ratio should have improved significantly and that “will allow us the opportunity to look at that again.”

“But right now we don’t have any plans for another reduction,” Castro concluded.

For the record, the talk was focused on millennial housing issues, and FHA loans tend to go to a lot of first-time home buyers with little set aside for a down payment.

By the way, the cut in January made FHA loans a cheaper option relative to conventional financing for most scenarios, at least if you believe the Urban Institute’s study.

Prior to the reduction, conventional loans were generally cheaper unless the borrower had a FICO score of 680 or higher.

So it’s doubtful that the FHA would lower premiums again just because they can. If they’re already the best deal in town there’s no real impetus, though the lower 3% down payment now required at Fannie/Freddie could provide a spark.

But I wouldn’t hold out for anything better.

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