FHA: Time to Stop Overcharging Today’s Borrowers for Yesterday’s Mistakes

From RealTrends.com: The federal government’s home mortgage insurance program is finally back in the black, having improved materially over the past year, yet its insurance premiums remain at record-high levels. Our analysis indicates that that Federal Housing Administration (FHA) can significantly lower its premiums—charging current borrowers more appropriately for their risks—while continuing to build the necessary reserves against future losses. Today’s high premiums penalize current borrowers for the pricing and performance of the earlier vintages and the deficit in the reverse mortgage program—the two main causes of the fund’s continuing inability to meet its 2 percent congressionally mandated reserve ratio.

Our analysis released today on the 2014 Actuarial Report on the FHA MMI Fund explains that the MMI’s failure to meet the 2013 predictions was driven primarily by  negative revisions to the economic value of the Home Equity Conversion Mortgage book, poor performance of loans made before and during the financial crisis, and a shortfall in revenues driven in part by today’s higher premiums.

The mixed message of the actuary—showing an agency whose business continues to improve, though not as quickly as had been expected—raises the question of whether the FHA can afford to lower their historically high insurance premiums, expanding access to credit and avoiding, at least in part, a worsening adverse selection problem (see page 33 of our monthly chartbook). We reviewed the economics of the credit mix of FHA’s current and desired books of business to answer this question.