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F.H.A. Loans More Affordable

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An announcement by the Obama administration that the Federal Housing Administration would lower its annual insurance premiums by 0.5 percentage point could make it possible for a quarter-million more borrowers to buy their first homes, according to the agency’s estimates.

Since 2010, insurance premiums on the low-down-payment mortgages backed by the F.H.A. have soared 145 percent in order to help raise funds to restore the agency’s badly depleted reserves. But there have been growing complaints that the increases have made the loans too costly for the buyers who need them most.

In a press briefing on Thursday, Julián Castro, the secretary of the Department of Housing and Urban Development, which oversees the F.H.A., said an estimated 400,000 creditworthy borrowers had been priced out in 2013 because of higher insurance costs. He asserted that the F.H.A. was now in a strong enough position to broaden access to credit by reducing annual premiums to 0.85 percent of a loan’s value from the current 1.35 percent.

For new F.H.A. borrowers, the reduction would mean an annual average savings of $900, Mr. Castro said.

F.H.A.-backed loans became the go-to source of financing after the housing market crashed and private lenders pulled back. But default rates later soared, primarily on loans made from 2007 to 2009, leaving the agency’s insurance fund with a negative value of $16 billion by fiscal year 2012.

Tighter underwriting standards and a series of six increases in insurance premiums have put the fund back in the black, with a balance of $4.8 billion, according to the F.H.A.’s annual report published late last year.

In a letter last month to Mr. Castro, 18 senators cited the fund’s return to “solid footing” as reason to re-examine insurance premium levels to determine whether they could be “reasonably and safely lowered” to levels more affordable for “creditworthy families.” The senators’ request followed earlier pleas for premium reductions by various consumer and industry groups, including the National Association of Realtors and the Mortgage Bankers Association.

Earlier fee increases were “eliminating a lot of the people that F.H.A. is designed to help, and that’s the lower-income and first-time buyers,” said Chris Polychron, the president of the National Association of Realtors.

Mr. Polychron cited research by his association showing that the percentage of first-time buyers using F.H.A. loans shrank to 39 percent from 56 percent over the last four years.

F.H.A.-backed loans are popular with many buyers because they require as little as 3.5 percent down, and the minimum FICO score requirement of 580 is lower than on conventional loans.

But the F.H.A. has been trying to balance its mission to expand access to credit against concerns about financial risk. While far more stable, its insurance fund has not yet amassed the required 2 percent capital reserve ratio, a target it was projected to reach in 2016.

Mr. Castro said the premium reduction would slow the agency’s progress toward that target by a couple of months. He emphasized that the new premiums were still 50 percent higher than pre-crisis levels, and that underwriting standards would not be relaxed.

“This action is not a return to the past,” Mr. Castro said.

The projected savings for borrowers over time are substantial. According to Zillow, the real estate information site, on a $175,000, 30-year F.H.A.-backed loan, a buyer putting down 3.5 percent would save nearly $4,000 over five years.

This article was originally published on 1/9/2015 at View the original here.