Only a few years after the Federal Housing Administration required $1.7 billion in special appropriations from Congress to cover losses in its single-family housing mortgage insurance program, some members of Congress now want to derail the agency’s efforts to return to some semblance of fiscal sanity.
Implementing these changes would be unfair to federal taxpayers that subsidize the cost of the Federal Housing Administration’s insurance programs, and to the private insurance companies that compete with the Federal Housing Administration.
What the Program Does
The Federal Housing Administration’s flagship program is the single-family housing mortgage insurance program, an insurance portfolio that has tripled in size over the last decade to almost $1.2 trillion.
The Federal Housing Administration does not directly lend through its flagship housing insurance program, and instead relies on eligible financial institutions to originate and service the loans.
Federal taxpayers cover through the program any losses over the life of the loan in return for borrowers paying premiums—both an upfront premium of 1.75 percent (applied to all loans) and annual premiums at different rates depending on specific loan terms—generally for the full term of the loan.
Except for certain cases of loans that have loan-to-value ratios below 90 percent at origination, where borrowers can terminate premium payments after 11 years, borrowers are indeed required to pay the insurance premiums over the full term of the loan.
Efforts That Would Further Weaken the Federal Housing Administration
Unfortunately, Rep. Maxine Waters, D-Calif., has introduced a bill that would allow borrowers in the program the ability to terminate insurance premiums once they hold 22 percent equity (78 percent loan-to-value) in their homes.
This would occur even though the Federal Housing Administration would continue to provide the benefit to the borrowers of covering losses should borrowers default on their loans for any reason.
Such a policy change would be unfair to federal taxpayers that subsidize the cost of the Federal Housing Administration’s insurance programs, and would only exacerbate the overall weaknesses that exist in the program.
To be sure, while actuarial reports of the Federal Housing Administration insurance program suggest improved financial health, separate research suggests that a high share of the loans in the program would fail under weaker housing market and economic conditions.
According to research from the International Center on Housing Risk at the American Enterprise Institute, the Federal Housing Administration—which backs roughly a quarter of the purchase-only mortgage market—has a stress default rate for purchase loans near 25 percent.
Indeed, if general conditions in the housing market and economy were to decline under severe stress, roughly 1 in 4 mortgages could likely fail.
While the Federal Housing Administration currently operates with capital reserves that slightly exceed the statutorily required 2 percent threshold, it is unlikely this reserve ratio would allow the Federal Housing Administration to maintain financial solvency under duress.
By comparison, the Federal Housing Administration’s private-sector mortgage insurer counterparts generally hold capital reserves up to four times this threshold, particularly those with portfolios of concentrated high loan-to-value loans.
Avoiding Misguided Reforms
To avoid a further bailout, neither Congress nor the Federal Housing Administration itself should undertake policy changes that would further weaken the agency’s ability to cover insurance losses should they occur for any reason.
Instead, and absent fundamental reforms that would ideally shut down the agency, policy reforms of the Federal Housing Administration should ensure that the agency maintains a limited role in the housing finance system, dallowing higher levels of private capital to enter the market and serve the housing needs of American households.
The Federal Housing Administration can accomplish these policy goals by lowering loan limits and adequately pricing insurance for borrower risk. Congress should ensure that Federal Housing Administration borrowers have to maintain mortgage insurance premiums over the full life of the loan, and avoid any misguided reforms that would further crowd out private-sector mortgage insurance companies.