Does FHA Really Need to Prop Up Private Mortgage Insurers?

by Gina Pogol
May 11th, 2010

A few years ago, FHA had less than six percent of the mortgage market share. As a loan officer during that time, I would run the numbers for my clients, and the results almost never indicated that FHA was the more economical option. Back then, you could get get an FHA mortgage with only 3% down, but you could get a Fannie Mae or Freddie Mac 97% loan as well. The Fannie or Freddie mortgage didn’t require an upfront mortgage insurance premium (MIP). And real estate agents hated FHA because they took longer and insisted on silly stuff like lead paint disclosures. Didn’t want to bring in even 3%? No problem, your Alt-A lenders didn’t require any down payment at all. And if you went further down the food chain, to sub-prime, you didn’t need to prove that you had a job, either. We had loan officers in our office who couldn’t even spell FHA.

Then came the real estate crisis. Lenders slammed their doors. The remaining ones tucked their tails between their legs (assuming that lenders have tails) and ratcheted their underwriting requirements way up. Mortgage insurers retired to lick their wounds (assuming that mortgage insurers have tongues). Fannie and Freddie in their their new government-guided guises instituted risk-based pricing, making it prohibitively expensive for  borrowers whose credit halos fell off or got tarnished by the economy. And FHA‘s market share soared to over 35%.

But FHA doesn’t want to be the 800-pound gorilla in the mortgage market. It would rather not have that much business. FHA Commissioner David Stevens said this morning, “…we have a bill in Congress right now that we need to get through because we have to change our fee structure to be more in line with how private mortgage insurance price. We think its critical to make an opportunity for the private sector to return…”

According to Inside Mortgage Finance, private mortgage insurers used to have 77% of the market for mortgage insurance; now they have 12%. Stung by foreclosure losses, the companies seemed content to sit on the sidelines, raising their requirements to the point where many loan agents I spoke to wouldn’t even consider putting a loan through Fannie or Freddie with less than 20% equity. Today, reassured by modification programs that seem to be stemming the tide of foreclosures, companies like PMI and Genworth are loosening up requirements a bit.

But it will take more than that to get people back to using private mortgage insurance. Risk-based adjustments by Fannie and Freddie make the addition of mortgage insurance on top of that a deal-killer when FHA provides an alternative. So Mr. Stevens believes that making FHA mortgage insurance even more expensive (the agency has already increased the upfront premium by 0.5% and now it wants Congressional approval to add up to another point to the annual premium too), it will force borrowers back into the waiting arms of the GSEs and private mortgage insurers.

I’m not sure that making mortgages more expensive for all is the best way to solve the real estate crisis and support an economic recovery.

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