The fees borrowers must pony up for mortgages backed by the Federal Housing Administration have gotten so high that consumer advocates and the housing industry’s most prominent trade groups want the agency to consider lowering the costs.

FHA loans have been a popular source of financing for first-time home buyers and low-income families because they require a down payment of only 3.5 percent. Even borrowers with credit scores as low as 500 can qualify if they put more money down.

But when the FHA’s finances took a hit after the housing bust, the agency tried to beef up its cash cushion by raising the “annual premiums” it charges borrowers.  Those fees, which are tacked onto the monthly mortgage payment, were raised five times since 2010.  They jumped from .55 percent of a loan’s value to 1.35 percent.

This surge translates into big bucks for FHA borrowers, and shuts too many people out of the housing market, the industry says.

For instance, a borrower who took out a $200,000 loan paid an annual premium of $91.66 per month before 2010. This year, a borrower who gets a loan of that size pays $225 per month in premiums. That’s a 145 percent increase.

The FHA does not make loans. It insures lenders against losses should the loans go bad, and it uses borrower fees to cover those losses. But last year the agency’s cash reserves fell so low that it had to turn to taxpayers for help for the first time in its 80-year history. It drew $1.7 billion from the Treasury.

The FHA’s finances have improved since then.  The agency recently announced that its cash reserves are back in the black for the first time in two years. Now, consumer groups -- including the Center for American Progress and Enterprise Community Partners -- are pushing the FHA to consider lowering its borrower fees.

"It's time for FHA to do as deep an analysis as possible on this issue," said Julia Gordon, CAP's director of housing finance and policy.  "We're very concerned that people are being unnecessarily shut out. It's important for taxpayers to be protected. But at the same time, the people being shut out are also taxpayers."

The Mortgage Bankers Association and the National Association of Realtors have been saying the same thing for months. The Realtors group estimates that the high fees may have kept up to 375,000 potential buyers from using FHA loans last year, some of whom could not secure other financing.  The group also says that the share of people who use FHA loans to buy their first homes shrank from 56 percent to 39 percent during the past four years.

In a report submitted to Congress last month, FHA put a positive spin on how much it helped first-time buyers, emphasizing that 81 percent (or 480,000) of the home purchase loans the agency insured last fiscal year went to that core market.

But that's 46 percent less than in 2010 (when FHA's popularity soared) and 30 percent less than in 2000 (more normal times), said Brian Chappelle, a banking industry consultant and a former FHA official. It's unlikely that the high fees are the only reason behind the drops.  Other factors are holding back potential buyers, including tight lending standards and a weak job market.  But the fees couldn't be helping, Chappelle said.

This chart shows that the number of FHA-backed loans for first-time buyers has been shrinking in the past few years:


In its report to Congress, the FHA also said it is trying to scale back its role in the housing market in hopes that the private sector will fill the void. The chart below shows that the agency's share of the market has diminished.  In 2010, the agency had 40 percent of all home purchase loans.  It now has about 22 percent.


FHA acknowledged that even as it’s pulling back, the home-buying market has not returned to normal. The volume of loans used to buy single family homes was 44 percent lower in 2008 through 2013 than it was from 1996 through 2001 – the pre-housing bubble era.


Housing officials have not said much about their future plan for borrower fees, even after the report was released. “FHA has made no decisions regarding the premiums,” said Cameron French, a spokesman for the Department of Housing and Urban Development, which includes FHA.  “We are regularly evaluating a number of factors to ensure our premiums are at the right levels. As a result of the most recent annual report, we are looking through new information and will use that to inform any future decisions.”

The FHA is in a tough spot as it weighs what it should do next. While it said it no longer needs taxpayer help, its cash cushion still remains well below the level required by law. That cushion should equal 2 percent of all the loans backed by the agency. Instead it equals just 0.41 percent.

The FHA has not hit the required 2 percent level since 2009, and an independent audit of the agency’s finances predicts it won’t reach that target until 2016.

If the agency’s leadership lowers the premiums before boosting its cash reserves to the mandated level, it may please consumer advocates and the housing industry. But it’s likely to anger lawmakers who control HUD’s budget.

That leaves the agency in a Catch 22, Chappelle said.  The agency had to raise its fees to help increase its cash reserves, but its cash reserves stayed low because it did less business when it raised its fees.