HUD Commissioner Wrong About FHA Mortgage Insurance

May 8 2014, 3:31pm CDT | by

Here we go again.

HUD Commissioner Carol Galante has raised the cost of FHA MIP (Mortgage Insurance Premiums), past the common sense cost/benefit paradigm for most consumers, who have responded by stepping back from the housing market. That is a fact, with interest rates still at historical lows; FHA loan volume is down 32% from last year.  Coincidently, FHA MIP costs have increased to the highest level in the history of FHA mortgage financing.

According to the Commissioner, one has nothing to do with the other.

Bloomberg.com contributor Kathleen Howley offered this headline on 05/07/2014; Americans Shut Out of Housing as FHA Fees Jump: Mortgages.

In her article, Howley reports that HUD Commissioner Galante disputes the claim that the new fees are keeping Americans from becoming homeowners. The current premiums correctly reflect the risks assumed by taxpayers, she said in a speech at a MBA conference last month. Any additional increases would start pricing first-time buyers out of the market, she said.

The Howley/Bloomberg article quotes; “We’re reaching a tipping point where we believe that further increases would reduce access to credit,” Galante said. “However, now is not the time to roll those premiums back. Right now we are priced appropriately and are reaching out to creditworthy individuals.”

Economics 101; The Law of Demandall other factors being equal, the higher the price of a good, the less people will demand that good. FHA MIP rises to the highest levels in FHA history and FHA loan volume falls 32% compared to last year. Pretty basic demonstration of supply and demand in action.

I submit that the Commissioner and the “smarter-than-the-rest-of-us” team of advisers justifying these increases, lack any practical, real world experience that can be used to fortify this argument.  She/they are wrong and the unjustifiably exorbitant costs of FHA mortgage insurance as compared to private mortgage insurance costs for conventional loans are proof. PMI (Private Mortgage Insurance) is in fact risk based and the costs are scaled based on risk layers, with the riskiest borrowers paying significantly less than comparable FHA borrowers.

Consider the PMI costs for the riskiest borrowers of a minimum down-payment conventional loan of $200,000. Private sector mortgage insurance would cost $217/month, while public sector FHA MIP would cost $3,500 up front and $225/month forever. Comparable monthly costs but $3,500 up front, for what?!  And oh by the way, that $3,500 is added to the $200,000 loan and the FHA borrower pays interest on it for 30 years.

According to the Commissioner, MIP pricing is risk based and appropriate, when in fact FHA MIP premiums fund government initiatives that have nothing to do with mortgage financing, and as a result, these premiums factor more than just borrower risk in the equation.  Right now in our nation’s capital, the OMB (Office of Management and Budget) is dancing with the CBO (Congressional Budget Office), trying to estimate revenues from FHA MIPs to craft a spending bill for transportation and housing programs that are funded by FHA Mortgage Insurance Premiums.  Yet we are to believe that these premiums are strictly risk based and appropriate.

As a mortgage originator on the front lines and somebody that actually works with FHA borrowers, I can argue with credibility that these premiums are not priced appropriately and do not reflect taxpayer risk, and that they have in fact,  priced buyers out of the housing market.

I am certain there is a blockbuster body of reasoning that the HUD team confidently parades to justify raising FHA MIP to where it is now, and I will bet that it sounds logical and well thought out.  But it is wrong, FHA loan volume is dropping dramatically, and oh, by the way, that means fewer people are buying houses, ergo, overpriced FHA MIP is negatively impacting the housing market.

I am calling on the Commissioner to lower FHA MIP, to accelerate loan volume (see The Law of Demand), and let market forces bring the housing markets up to full throttle. Now is in fact the time to roll back those premiums, the housing markets are a powerful economic engine that can deliver real economic growth.

Right now, FHA borrowers are being forced to support housing and transportation programs through their monthly mortgage payments.  If the best and brightest really do work inside the beltway, task them with finding an alternative, more appropriate funding source, have a bake sale or one of those tricky tray fund raisers, and leave first time homeowners alone.

 
 

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