Congress has handed the Federal Housing Administration (FHA) a golden opportunity to increase its share of the jumbo mortgage market, but Department of Housing and Urban Development (HUD) secretary Shaun Donovan doesn't want to exploit the situation.
The HUD secretary says the federal mortgage insurance agency may raise its premiums on FHA loans north of $625,500, but not because these higher balance notes are riskier. He told a congressional panel recently that the performance of FHA loans with balances up to $729,750 has been very good.
The reasoning behind a possible premium increase is to ensure that FHA does not crowd out private lending in the Jumbo market.
“I don't think the issue is that those loans pose a significant risk to the taxpayer or the [mortgage insurance] fund. The real issue is how we encourage private capital to come back [into the market] while making sure we continue to support the market,” Donovan said.
Congress recently restored FHA's maximum loan to $729,750, but left the Fannie Mae and Freddie Mac limit capped at $625,500.
This gives FHA lenders a clear advantage in the $625,500 to $729,750 space since they can securitize those loans through Ginnie Mae.
But FHA's mortgage insurance premium structure is not competitive at the Jumbo level. FHA has raised its premiums three times since the beginning of 2010 to cover continuing losses on loans made during the housing boom.
And FHA's premiums are considered steep by some. On a $700,000 loan, an FHA borrower would pay over $500 a month or $6,000 a year to cover the annual insurance premium. Raising the annual or upfront premium would make it any even more expensive.
HUD is planning to release “specific proposals on how we move forward” with high-balance loans, Donovan said, as part of the department's fiscal year 2013 budget.
Donovan also told the congressional panel that older FHA loans underwritten during the housing bubble will continue to produce substantial losses. The FHA actuarial report shows that one of four loans insured in 2007 will result in insurance claims and losses on the 2008 book of business. These charges eventually may total $10 billion. This is why HUD is “examining a range of additional steps to further strength the fund,” Donovan testified, including enhancements to its loss mitigation programs and “whether additional premium increases are necessary.”
The secretary also told the lawmakers that HUD is close to issuing final rules that will reduce seller concessions on FHA loans and strengthen the FHA indemnification process.
In an FHA transaction, the seller can kick in 6% of the sales price to cover the buyer's closing costs or points. HUD proposed to reduce seller concessions to 3%. The final rule could go into effect just as the spring sale season begins.
The indemnification rule will impact FHA's largest lenders that participate in the “delegate lender insurance” program and who originate nearly 70% of all FHA loans. The agency will hold lenders responsible for loans that were “improperly originated or in which fraud or misrepresentation were involved,” Donovan said. The final rule is expected to formalize the indemnification process for determining when a lender is responsible for reimbursing FHA for losses on bad loans and establish new standards for “serious and material violations” that trigger indemnification.
“The indemnification process they have been using up until now has never been formalized in an actual regulation,” said Bud Carter, an FHA consultant with Potomac Partners here. “This rule will formalize their authority to request indemnification.”