The Federal Housing Administration’s rise in its mortgage insurance fees in recent years is pricing many “creditworthy Americans out of the market” and causing the number of first-time home buyers to reach new lows, housing analysts argue.
First-time home purchases have fallen to historic lows. They account for about 28 percent of existing-home sales year-to-date – well below the long-term benchmark of 40 percent, according to the National Association of Realtors.
The 24- to 35-year-old cohort – which usually makes up the largest share of first-time buyers – has been faced with high levels of student debt and stricter underwriting standards that have made it more difficult for them to apply for a mortgage. But in an op-ed piece in American Banker, Richard A. Smith, CEO and president of Realogy Holdings Corp., also notes that the “biggest and most surprising challenge faced by today’s aspiring home owners come from the FHA, the very agency created to help them.”
The agency has more than doubled its mortgage insurance fees since 2010, as it tries to cover a wealth of defaults that the agency faced in the aftermath of the financial crisis.
“This was a necessary step,” notes Smith, who also serves on the housing commission of the Bipartisan Policy Center and the policy advisory board of the Harvard Joint Center for Housing Studies. “However, premiums are still at crisis levels years later. For many would-be home owners, it's just too much.”
Monthly premiums for FHA-insured mortgage totaled 0.55 percent of the loan amount in 2010. But today, it has bloomed to 1.35 percent – a 145 percent increase, amounting to an additional $120 on a monthly mortgage payment for a $180,000 loan. The up-front fee that borrowers are required to pay the FHA also has risen, increasing from 1 percent of the loan amount to 1.75 percent.
The FHA’s higher mortgage premiums have pushed 1.5 million renters over a sustainable debt-to-income level to qualify for a home loan in 2013, according to National Association of REALTORS®’ research.
As such, the FHA’s lending has fallen sharply too. This year, the FHA will likely assist about 450,000 first-time home buyers, down about 33 percent from its historical averages. From 2009 to 2013, the FHA assisted about 690,000 first-time buyers annually. What’s more, the FHA traditionally supported the purchase of nearly 100,000 condos annually. However, in the past 12 months, the agency has supported only 17,000 condo purchases.
In the op-ed piece, Smith urges the FHA to adjust its policies and reduce its monthly premiums to pre-crisis levels. He also says the FHA should consider enabling borrowers to finance their mortgage insurance over the life of the loan, which would allow the FHA to “improve affordability for consumers without eliminating revenue.” He also notes the alternative that the FHA could eliminate the requirement that buyers pay for mortgage insurance over the entire life of their loan and allow borrowers to drop it when they reach 20 percent equity, as is done in the conforming loan market.
“A new approach to lending policy will be necessary if the U.S. economy is to benefit from a resurgence in first-time home purchases,” Smith says.