The Federal Housing Administration will reduce the annual premium borrowers pay, in order to expand credit access to more Americans, the government announced Monday.
Borrowers who close on an FHA mortgage after January 27 will pay 25 basis points less for the mortgage insurance premium, the Department of Housing and Urban Development said.
Like Fannie Mae FNMA, +0.76% and Freddie Mac FMCC, +0.00% , FHA doesn’t make loans but provides a backstop for lenders. The annual premium fees fund the FHA’s Mutual Mortgage Insurance Fund, which helps the agency protect against losses incurred if borrowers run into trouble.
Congress requires that FHA have enough reserves to cover projected losses over 30 years. In 2013, it fell short on that threshold and had to receive a cash bailout of $1.7 billion. Separately, the agency must maintain the fund’s net worth of at least 2% of its loan portfolio.
In a statement, FHA noted that the reserve ratio stood at 2.32% last year, the second year in a row to exceed the 2% threshold.
“After four straight years of growth and with sufficient reserves on hand to meet future claims, it’s time for FHA to pass along some modest savings to working families,” HUD Secretary Julian Castro wrote.
But many analysts think it’s much more than the insurance premium that’s holding back lending.
“I’m not quite sure how much it actually does,” Laurie Goodman, codirector of the Urban Institute’s Housing Finance Policy Center, told MarketWatch.
“When you look at opening the credit box, there are other actions like figuring out how to break down the False Claims Act so lenders aren’t running scared of more risky loans. That seems to me would have been more effective in terms of access to credit.”
Many big banks have left the FHA program after being slapped with heavy fines for what they perceive as minor infractions of the rules of FHA’s program. One large lender, Quicken Loans, sued the government after being fined.
In the wake of the financial crisis, as mortgage lending became more stringent, FHA lending has boomed, in part because it allows borrowers to take out mortgages with down payments as small as 3.5%.
This is the second such cut in insurance premiums. FHA implemented a 50 basis point reduction in Jan. 2015. The agency estimates this cut will save borrowers an average of $500 per year, and projects approximately 1 million people will take out an FHA mortgage in 2017.