Real Estate

FHA: Life of loan policy to remain, but agency considering options | 2018-07-12

It looks like there won’t be any significant changes to the Federal Housing Administration’s mortgage insurance program this year.

Earlier this week, new FHA Commissioner Brian Montgomery told a group of reporters that there likely won’t be a cut to the FHA’s mortgage insurance premiums this year, due to the health of the Mutual Mortgage Insurance Fund, the FHA’s flagship insurance fund.

And it appears that there won’t be any changes to the life of loan policy either.

According to Montgomery, the agency is not planning on making any changes to its life of loan policy this year.

Over the last few years, many in the housing business have called for the FHA to eliminate the life of loan policy, which requires most FHA borrowers to maintain mortgage insurance throughout their entire loan term, regardless of how much principal is still owed.

In this way, the FHA’s mortgage insurance program works differently from private mortgage insurance, which typically falls off after a borrower reaches a certain principal balance.

The FHA’s policy wasn’t always this way.

The FHA’s previous policy of requiring borrowers to pay mortgage insurance premiums until the outstanding principal balance reaches 78% of the original home value, but the FHA instituted the life of loan policy back in 2013, as part of an effort to improve the health of the MMI Fund.

The FHA needed a $1.7 billion bailout in 2013, due to the significant shortages in the MMI Fund. But in recent years, the fund’s health improved, exceeding its congressionally mandated target in each of the last three fiscal years.

But the fund performed weaker than expected last year, with the MMI Fund’s capital ratio falling for the first time in five years.

Earlier this week, Montgomery cited the fund’s 2017 decline as a reason why the FHA would likely not be making changes to its annual MI premiums or the life of loan policy this year, but Montgomery did leave the door open for potential changes to the life of loan policy down the road.

Montgomery, who’s been at the FHA for just over a month, said the FHA is currently in “fix-it mode” and doing “heavy triage” on the agency’s forward and reverse mortgage book, trying to determine any issues that could lead to reverberations in the MMI Fund.

Part of that top-to-bottom look at the FHA’s business included a “full-throated” discussion about potential changes to the FHA’s mortgage insurance policies.

Included in that discussion were options for changes to the life of loan policy, although Montgomery said that it is too early to say whether any changes will be coming in the future.

“Well, part of the discussion we had during our triage was looking at premiums in general. And that was one of the concerns I had around the proposed cut at the end of the last administration, was that they would be, in effect, tying the hands of the next administration,” Montgomery said earlier this week, referencing the Trump administration’s decision to reverse a cut to FHA premiums that was announced by the Obama administration in its last days.

“So part of this was rewinding the clock a little,” Montgomery said.

Montgomery then revealed some of the options that were discussed for the future of the life of loan policy, but cautioned that the options were merely discussed and no decisions were made.

“Certainly, the life of loan is one consideration. Potentially, could there be some changes to it?,” Montgomery said.

“What would that look like? Could there be a step-down, if you will, over a period of time? Again, we were all discussing options. I’m not saying that they were the primary option or even in the top 10,” Montgomery continued. “Again, that was something we discussed, but it’s probably too early to say much more beyond that.”

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