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Senate Democrats Urge HUD to Reduce M.I. Premiums

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Democrats in the U.S. Senate are calling for a reduction in mortgage insurance premiums on government-insured loans.

The request was made in a letter sent Thursday to Department of Housing and Urban Development Secretary
Julian Castro.

Signing the letter were
18 senators including Sen. Elizabeth Warren (Mass.), Sen. Charles E. Schumer (N.Y.) and Sen. Dianne Feinstein (Calif).

The letter
was announced by Sen. Barbara Boxer (Calif.)

According to the
letter, the Federal Housing Administration has been successful in recent years improving the  financial position of its Mutual Mortgage Insurance Fund.

In HUD’s annual report to Congress last month, the MMIF finished fiscal-year 2014 at $4.8 billion, a $6 billion improvement over a year earlier and a stark turnaround from the negative $21 billion two years earlier.

The success can be partly attributed to
increased premiums, according to the senators. Annual premiums are now 145 percent higher than they were in 2010.

But the higher premiums cost a borrower on a $200,000 loan $1,600 more a year.

As a result, according to the letter,
375,000 potential home buyers were priced out of the market in 2013. This has led to a steady decline in FHA-insured purchase financing.

“With the improved outlook of the MMIF, we believe now is an appropriate time for the FHA to reexamine its premium levels to determine whether they can be reasonably and safely lowered,” the letter stated. “While preserving the solid footing of the reserve fund is essential, reducing fees does not necessarily conflict with this goal.”

The senators suggested that lowering premiums could increase loan originations and help restore the MMIF
more quickly.

While groups like the National Association of Realtors and National Association of Home Builders that stand to benefit from such changes are likely to throw their support behind the senators’ recommendation, other groups like the American Enterprise Institute see it differently.

“Since FHA’s financial future is still uncertain, now is not the time to reduce premiums,” AEI”s Edward Pinto said in a written statement following the release of HUD’s annual report in November.

Pinto explained that FHA reserves fall far short of what would be needed in the event of even a minor recession.

And while FHA has benefited from rising home prices that resulted from the Federal Reserve’s quantitative easing strategy, FHA’s concentration of loans is backed by collateral located in areas with low-income and minority residents — areas where home prices tend to be volatile.

“As a result, if the US economy catches a cold, FHA and its highly leveraged borrowers will catch pneumonia,” Pinto stated.

Even Castro
noted that it is too soon to cut premiums.

“That analysis has not yet been done,” Castro told Bloomberg on the day the actuarial report was released when asked about lowering premiums. “We just got this annual report, and so we’ll be taking the time to do the due diligence that is part of answering that question.”

Improvement in FHA MMIF Not Enough to Cut Premiums (Nov. 17, 2014)
The capital position of the Federal Housing Administration’s insurance fund has improved but not enough to reduce mortgage insurance premiums.

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