Wednesday, February 16, 2011
A World Without Fannie and Freddie--At Least We Still Have FHA
Last May, I wrote a post for this blog entitled, "Every Loan a Government Loan" in which I talked about the proposed bill by Maxine Waters to statutorily raise the FHA annual premium from .55% to 1.55% and the annual to a maximum of 3%. At the time, HUD was looking for assistance from the Realtor community to lobby Congress on behalf of the change. One of the Realtors I know who was reading the blog sent a copy to David Stevens, FHA commissioner, to ask him whether the information contained in it was true. Stevens promptly responded with a personal email to me and to the real estate agent that the information was in fact not true. Stevens wrote, "The current premium is 2.25% up front and .55% annually. Under the legislation, FHA will have the authority to raise the annual higher but as stated the fees will be changed as follows: the upfront will drop from 2.25% to 1% and the annual will go from .55% to .90%. the trade off is easier for the market by lowering the upfront it impacts initial equity less and the trade off is the increase to the annual." When in a response email I pressed him on the fact that the verbiage of the bill allows FHA to increase their premium to 1.55%, Stevens replied that the increased premium gives FHA room for years to come without going back to Congress for authorization.
Fast forward nine months later to the Obama Administration 2012 budget which includes raising the FHA premium again. The new increases, announced by FHA on February 14, 2011, go into effect April 18, 2011, and raise the annual premium for loans at less than 95% loan to value from .90% to 1.10. Loans at greater than 95% will see an annual premium jump from .90% to 1.15%. Loans under 90% loan to value that previously did not have annual MI will see .25% annual MI for case numbers assigned after April 18, 2011 and those between 90-95% will now have annual MI of .50%. The upfront MI remains at 1%.
Why, you may ask, would the government want to increase FHA premiums right now just at the time that they have announced that Fannie Mae and Freddie Mac are going to be phased out? Simply put, part of the Administration's Housing Plan is to reduce the role of FHA while closing down Fannie and Freddie. Remember that the Administration's goal is to find solutions through "robust" private market initiatives--a lofty goal considering that the same Administration is heaping on more regulations to the lending world than ever before.
"In addition to winding down Fannie Mae and Freddie Mac, FHA should return to its pre-crisis role as a targeted provider of mortgage credit access for low- and moderate-income Americans and first time homebuyers. (Today, FHA's market share is nearly 30%, compared to its historic role of between 10-15% percent.) As Fannie Mae and Freddie Mac's presence in the market shrinks, the Administration will coordinate program changes at FHA to ensure that the private market--not FHA--picks up that new market share."
Although the Housing Finance Plan gives FHA currently a nearly 30% market share, Housing Wire estimates that 40% of all purchase loans originated in 2010 were FHA loans. What is very interesting is that the Housing Plan wants to return FHA to their historic levels of 10-15%. And over the course of their existence--since the 1930's--that may be an accurate average. However, by 2006, just before the housing collapse, FHA had between 2-4% of total market share. The product had become obsolete as it had been crowded out by "robust" private market solutions. FHA's 3% down payment (which is now 3.5%) could not compete with private market solutions of 100% financing and sometimes greater. Also, because FHA had guidelines that prevented most small brokers from qualifying to sell the product, they had limited access to the consumer in a mortgage market driven by mortgage brokers and independent originators. Those factors, coupled with the fact that FHA had comparatively low loan limits, meant that their market share had dried up so much that many believed that the program had outlived its usefulness.
Today, however, FHA is responsible for 40% of purchase loans--up from no more than 4% five years ago! So who pulled FHA off life supports, resuscitated the program, and transformed it into a primary provider of mortgage money? The government, of course. As part of the Economic Stimulus Act of 2008, FHA's loan limits were raised to up to $729,750 for high costs areas, with a floor of $271,050. for all areas. In Alaska, Hawaii, the Virgin Islands and Guam FHA loan limits are $1,094,625.00. By changing the requirements for qualifying income and raising the loan limits, a product that could not compete with private market products became the financing vehicle of choice for nearly everyone who could qualify for it.
Now, however, the Administration wants to scale FHA usage back. One way to accomplish this is to raise the fees to make it less competitive. "As we begin to pursue increased pricing for guarantees at Fannie Mae and Freddie Mac, we will also increase the price of FHA mortgage insurance. We have already acted on this front, raising premiums two times since the beginning of this Administration. And we will put in place another 25 basis point increase in the annual mortgage insurance premium that is detailed in the President's 2012 Budget. This will continue the ongoing effort to strengthen the capital reserve account of FHA, and put it in a better position to gradually shrink its market share."
Other goals to reduce FHA market share include decreasing the FHA loan limits. The Administration is going to let the present limits expire on October 1 and then will review whether to further decrease the loan limits. Historically, the FHA loan limits have been 115% of the median housing prices of the markets they serve. Going forward, "the Administration will make sure that creditworthy borrowers that have incomes up to the median level for their area will have access to these mortgages [FHA], but we will do so in a way that does not allow FHA to expand during normal economic times to a share of the market that is unhealthy and unsustainable."
To put this in perspective, I did a little research. According to Census.gov, in 2008 the median household income in El Paso, Texas was $36,519.00; the median income for the state of Texas was $50,049. The median home price in El Paso, Texas in 2009 was $115,300, and the median home price for the state of Texas was $125,800. So to qualify to use FHA, under the Administration's proposed guidelines, a young couple purchasing a home in El Paso needs to have a combined income of no more than $36,519.00 and be purchasing a home costing no more than $132,595.00. The Housing Plan also proposes raising the required down payment for FHA loans so that borrowers have a greater investment in their home.
We are not supposed to be concerned about this credit tightening, because the private market is supposed to make up the difference with new mortgage products. But in the new world of Dodd Frank, where products that the government considers higher risk require that the originator retain 5% of the loan in their portfolio, aggressive new products may be very hard to find. And since the Dodd Frank bill automatically exempts FHA mortgages from the 5% risk retention rule and treats them as qualified residential mortgages, lenders will continue to try to put as many borrowers into these loans as possible, no matter how difficult qualifying becomes.
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