Why a government agency won’t lower mortgage fees for borrowers


The recovery remains underway. (REUTERS/Kevin Lamarque)

Two influential housing industry trade groups voiced alarm this month about the fees borrowers must pay when they take out a mortgage backed by the Federal Housing Administration – a popular source of loans for cash-strapped, first-time home buyers.

The National Association of Realtors and the Mortgage Bankers Association sent letters to the agency asking it to lower the “annual premiums” that are tacked onto monthly mortgage payments. The FHA has raised these types of fees five times since 2010,  from .55 percent of the loan’s value to 1.35 percent.  Those fees and others are used to cover lender losses when borrowers default on a mortgage. (The agency itself does not make loans --  it insures lenders against losses if the loans go bad.)

But the industry says the fees have become too expensive, shutting out the very borrowers that the agency is meant to serve.  The Community Home Lenders Association lodged a similar complaint in a letter to the White House earlier this year. MBA says borrowers who take out a $100,000 FHA  loan in 2014 will pay about $600 more in fees each year than they would have in 2008 on a 30-year, fixed rate mortgage.

Still, the FHA is holding firm as the Obama administration pushes to scale back the government’s role in the housing and protect its coffers. Here’s what FHA Commissioner Carol Galante told The Washington Post about her agency’s position on this matter.  The interview has been edited for clarity and length.

Why has the agency increased the premiums so much?

It’s important that every financial institution price properly for the risk it’s taking on.  I do think that we have reached a tipping point though, and I can clearly say we’re not going to continue to increase premiums. But it’s also not the time to do a wholesale rollback of the premiums. FHA’s financial condition is not where it should be yet.

[What this means: When lending sources dried up during the financial crisis, the FHA propped up the housing market by insuring the lenders it works with against losses and enticing them back into the market. But FHA’s default rate shot up as its loan volume expanded, depleting its cash reserves to levels below what is required by law. In September, FHA tapped taxpayer money to cover its losses for the first time in the agency’s 80-year history. The president’s most recent budget request projected that FHA will not need taxpayer dollars to cover losses in fiscal 2015]

About 50 percent of all home purchase loans were backed by the FHA in 2008. The agency’s market share now stands at about 20 percent. Do you think that the high annual fees cut into demand for FHA loans?

The last set of premium increases went into effect literally at the same time that mortgage interest rates jumped, so it’s hard to disentangle how much of the drop is related to premium increases versus interest rate increases. It’s also important to note that activity in the whole mortgage market dropped when interest rates started to go up, so it’s not just FHA volume that’s down.

The Realtors group said high FHA premiums may have shut hundreds of thousands of potential borrowers out of the market, particularly first-time homebuyers and minorities. Is the push to reduce the government’s role in the market at odds with the FHA’s mission to serve these groups?

They’re not at odds. People will generally be better served in the long run with more robust competition in the private market. FHA, Fannie Mae and Freddie Mac together support 90 percent of the mortgage market.  We want to see more private capital come in because the government is taking nearly all the risk right now.  If we can have a system where there is more private sector capital at risk, that’s greater protection for the taxpayers.

Are there signs that the private sector is coming back into the market?

Private label security is slow to come back. Those are the mortgages that are pooled together and sold to investors by the private sector without any government backing.  I think there’s a number of reasons why (private sector participation) is not happening, and frankly I don’t think most of those have anything to do with FHA.  They have to do with lack of certainty around the future of the housing finance system. But the private mortgage insurers have picked up a significant share of FHA’s business, and the private mortgage insurers are private capital.

[What this means: Mortgage lenders typically require private mortgage insurance if a loan exceeds 80 percent of the value of the home. The insurance does not protect the borrower, but the lender, should the borrower default. Fannie and Freddie, which are controlled by the government, buy certain low down payment loans with private mortgage insurance. The Realtors say many potential buyers who are priced out of FHA can’t migrate to private mortgage insurance, either because of higher cost or lack of availability.]

Are you worried that FHA will eventually get stuck with the poorest credit quality borrowers because higher quality borrowers will refinance into less expensive mortgages?

FHA’s mission is to have lenders providing credit to borrowers that they might not otherwise serve if not for insurance from the government. When you have higher credit score borrowers going to other channels of lending, we don’t think that’s a bad thing as long as FHA remains appropriately priced for the credit risk we are insuring.

(What this means: FHA has a minimum credit score requirement of 500. But borrowers with credit below 580 would have to make a down payment of at least 10 percent instead of the usual 3.5 percent.  Currently, FHA has basically no borrowers with scores under 580.)

The FHA often notes that lenders are imposing tougher credit score requirements than FHA requires. Why would lenders do that?

I hear from lenders that they're concerned that the FHA will not cover their losses on loans that default if they have violated our guidelines when making those loans. I also understand that they're worried about the servicing costs. Another possible reason is that lenders didn't feel a lot pressure to generate home purchase loans during the refinance boom. That may change now.

If lenders abide by those guidelines, is there any assurance that other regulators or law enforcement agencies won’t take any enforcement actions against them?

Lenders have always been held accountable for their underwriting of FHA loans. That's still true going forward. You will always have the Department of Justice, for instance, looking at how FHA handles its compliance issues and how lenders handle their compliance issues. We are working on changes that will provide greater transparency so that lenders better understand how we determine what a challenging loan is and make adjustments early on in their own processes, which will help them stay in compliance and perhaps help them to avoid enforcement actions.

What is FHA’s ideal market share?

I am loathe to quote a particular market share because that goes back to how big the market is.  We clearly want to be in a place where we are available and accessible to a broad swath of the population while not taking over the market.  It’s about not being a dominant player while also not being irrelevant.

 

 

Dina ElBoghdady covers housing policy for The Washington Post.
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