The Senate approved legislation late Wednesday designed to help the Federal Housing Administration (FHA) replenish its depleted finances.
The bill, which passed by unanimous consent and is expected to be signed by President Obama as early as next week, would let the mortgage insurance agency raise annual premiums to help cover losses to its trust fund, while reducing up-front assessments that can make it harder for an FHA borrower to sell a home.
The agency's Mutual Mortgage Insurance Fund (MMI Fund) has seen its capital ratio drop to 0.53%, far below the statutory minimum of 2%.
FHA Commissioner David Stevens lauded passage of the bill, saying it would give the agency flexibility to adjust its premiums "at a time when our reserves are perilously low."
"With this authority, FHA is in a better position to address the increased demands of the marketplace and return the MMI fund to its congressionally mandated level without disruption to the housing market," he said.
During the financial crisis, the FHA was a crucial source of credit as the private market contracted. But delinquent and other troubled loans have depleted its reserves.
"The premium increase has been sought following concerns that the FHA trust fund does not have enough to cover anticipated losses," Edward Mills, a research analyst at FBR Capital Markets Corp., wrote in a note to analysts. "The current premiums are too low to cover the risk the federal government is assuming by providing this insurance."
Under the legislation, the FHA would be able to lift its premium from 0.55% of the outstanding loan to as much as 1.55%. The current average FHA premium is 0.52% of the loan.
The FHA has said it will not raise its premium to the new cap immediately. Instead, it will charge an annual premium of 0.90% to borrowers who make a down payment of 5% or less and 0.85% to borrowers who put down more than that.
"We are encouraged that FHA Commissioner Stevens has indicated he may not need to raise premiums to the maximum," said Robert Story, chairman of the Mortgage Bankers Association (MBA), "and we believe that a small increase in the annual premium, coupled with a decrease in FHA's up-front premium, will help stabilize FHA while lowering closing costs for many borrowers."
The Congressional Budget Office (CBO) estimated that the average annual premium would increase to 0.88%. It also anticipates that the FHA would partially offset the increased premiums with a decrease in the up-front premium, from 2.25% of the loan amount, to 1%. Analysts agree that the FHA is likely to reduce the up-front premium on borrowers.
"This means a borrower who puts down 3.5% cannot sell the home after real estate commissions without either having the home appreciate or having to put more equity into the home," Jaret Seiberg, an analyst at Washington Research Group, a division of Concept Capital, wrote in a note to analysts. "By lowering the up-front fee, borrowers are less likely to find themselves underwater. Or at least that is the theory."
The CBO also estimates the bill would shrink the volume of FHA-insured loans by 3.3%, to $232 billion, from $240 billion in 2011, because a higher annual payment could deter certain borrowers.
FHA rates have typically been less than mortgage insurance rates. As a result, lenders and borrowers were encouraged to favor FHA-insured loans over those that would require private mortgage insurance.
The bill also would require that the secretary of the Department of Housing and Urban Development release a proposal to carry out the legislation and appear before Congress to discuss his actions within nine months of enactment.
The Senate also cleared a separate bill late Wednesday that would increase the FHA's multifamily lending guarantee capacity by $5 billion to ensure that it remains in the business through yearend. This bill is nearly identical to one passed by the House.
The MBA said that, without this increase, the FHA "would have exhausted its current authority sometime in mid-August and would have been forced to stop issuing any commitments to insure the loans in their current pipeline of applications until the next fiscal year, which begins Oct. 1."