Yesterday, the Federal Housing Agency reported that its Mutual Mortgage Insurance Fund currently has a positive net worth and capital reserves. As most of us know, FHA loans require the lender to collect mortgage insurance in order to protect the mortgage lender if the borrower defaults and the outstanding loan amount can’t be recouped though the sale of the property. Mortgage insurance is compiled to protect all lenders that issue an FHA loan. This insurance fund having a positive net worth means that less borrowers are defaulting on their FHA loans, so we can deduce that the pool of reserves insuring every FHA loan is healthy. Lenders are covered, and there’s even a small surplus. This is all great news!
While a surplus could open the door for a reduction in mortgage insurance premiums, FHA commissioner Brian Montgomery announced the agency will keep the current premiums at the levels they’re at. It’s being reported the fund is currently sitting at $34.86 billion, which is an increase of $8 billion from this time last year. It also has a capital reserve ratio of 2.76%, which is a significant increase from last year’s 2.18%. Congress mandates the fund maintains at least 2% in the ratios, and 2018 marks the fourth year in a row the fund has hit this benchmark.
Realistically, the difference of 2% and 2.76% is still a very thin margin (even when we’re talking about billions of dollars). Lenders should rejoice over the strength of the FHA MMI Fund; it’s the clearest sign that less borrowers are defaulting on their loans. One area of hesitation is how the refinance market has shifted. While we’ve seen a change in the market (refi-heavy to purchase-heavy), cash-out refinances make up more than 63% of all refinance transactions. This is a significant increase from last year, when the figure sat at 39%.
This increase in cash-outs poses a huge potential risk for FHA lenders. FHA borrowers are taking on almost double the debt they did last year, and one could argue this would double the risk for lenders as well. ESPECIALLY when you consider rising interest rates and inflated home values. To make matters worse, the percentage of borrowers with a DTI above 50% has reached an all-time high, and the average credit score of 670 is the lowest since 2008. The stats of these key performance indicators are what have the FHA seriously concerned about a potential massive issue for themselves, lenders, and borrowers alike. So while things are looking up on the balance sheet, it would be foolish to lower MI premiums. The MMI Fund needs to remain strongly positive in anticipation of this current trend going in the opposite direction.
In closing, the report confirms the agency is appropriately managing its risk while giving lower and middle-income Americans the opportunity for affordable housing.
Have a great weekend,
Peter