Speaking in front of the House of Representatives Financial Services Committee, Housing and Urban Development Secretary Julian Castro postulated that the Federal Housing Administration is not jeopardizing the state of its financial coffers through a recent move that reduced mortgage insurance premiums by half a percentage point.
In January, the FHA announced it would be reducing annual mortgage insurance premiums from 1.35 percent to 0.85 percent, despite the fact that there is a capital buffer underneath the statutory minimum percentage. This raised concerns that the FHA could be setting a dangerous precedent in the mortgage space, but according to Castro, the Obama administration’s moves represent “a careful balance between strengthening our fund and advancing our mission.” Castro added that it would not be right to “unduly burden borrowers in the present” because of the risky mistakes that were made in the run-up to the worldwide economic crisis of the late 2000s.
The FHA does not make mortgages, but it does insure approved lenders, passing on the risk to consumers through their monthly mortgage fees. As they allow consumers to purchase a home with a down payment of only 3.5 percent and a lower minimum FICO score than what is required by government-sponsored entities Fannie Mae and Freddie Mac, FHA products have been quite popular among lower-income consumers, as well as first-time buyers who have yet to sufficiently build up their credit.
With the reduction in mortgage premiums, the FHA claimed previously that this could be a fillip for first-time buyers to purchase and for the broader housing market’s improvement. According to the FHA, consumers stand to save an average of $900 per year through the reduction in insurance premiums.
Not surprisingly, House Republicans have not been supportive of the FHA’s move, claiming that the agency is opening the housing market to riskier consumers at a most inopportune time, and that the FHA has been unreasonably optimistic in its previous forecasts.
For instance, Congressman Jeb Hensarling (R-Tex.), chairman of the Financial Services Committee, previously said that the FHA’s previous predictions have not been proven true, and that the agency is “again in violation of the law that is there to protect taxpayers and homeowners.” The Texas representative said that the committee will “thoroughly” investigate the HUD with regards to its practices, and that Castro will have to make another appearance to justify his agency’s budget submission.
Last year, the FHA took up a mere 33 percent share of the mortgage insurance space, or less than one-half of the all-time high of 69 percent recorded in calendar 2009. In 2013, the FHA had to make its first-ever draw in the agency’s history, taking from $1.7 billion of taxpayer funds. Pursuant to becoming solvent again, the FHA raised mortgage insurance premiums, a move that eventually had proven successful for the agency. Currently, the FHA’s mortgage insurance fund capital ratio is at 0.41 percent, or just about one-fifths of the 2 percent legal requirement; it expects to reach the 2 percent threshold sometime next year.