CHLA Says FHA Should Cut Premiums, End Life Of Loan

In its budget proposal this week, the Biden Administration allotted a 34% budget increase for the Department of Housing and Urban Development of $11.6 billion over the fiscal year of 2022.

This proposed budget includes $32 billion for the Housing Choice Voucher Program and almost $2 billion for the HOME Investment Partnership, aimed at affordable housing strategies.

The industry has so far applauded the budget for its investments in housing as affordability dwindles and many Americans struggle to find housing within their budget.

“A president’s budget is a wish list of policy goals and ambitions,” Shannon McGahn, the National Association of Realtor’s chief advocacy officer, said.

“Many changes will be made to this plan, but it is good news that the White House sees this issue for what it is—a crisis—and many in Congress on both sides of the aisle agree.”

For some, the budget increase is a sign that the Federal Housing Administration has room to adjust its policies.

“FHA’s continued very strong profit projections contained in today’s federal budget release reaffirms the need for FHA action to cut annual premiums and end its Life of Loan premium policy,” Scott Olson, Executive Director of the Community Home Lenders Association, said in a statement.

“Four months after an FHA Actuarial Report showing FHA’s net worth is almost 4 times its required statutory minimum, projections showing an $8.8 billion net profit in new loans this year and $6.8 billion next year confirms that it is time to rightsize premiums for FHA borrowers.”

FHA loans require that insurance premiums be paid over the 30-year life of the loan. This is unusual among mortgage lenders thanks to the Homeowner Protection Act of 1998, which requires private mortgage insurance to be canceled once the loan-to-value ratio reaches 78%.

The FHA’s Life of Loan premium policy was reinstated in 2013.

“Life of Loan unquestionably overcharges borrowers for FHA loans,” Bill Glambrone states in a CHLA report, Life of Loan Premium Policy Hurts Borrowers And FHA.

“On a $200,000 mortgage, an FHA borrower would pay around $19,000 in premiums over the roughly 11 years it takes to reach 78% LTV.  But Life of Loan requires borrowers to pay an additional $15,000 in premiums over the remaining loan term.  The combined total premiums are almost 20% of the original home purchase price, many times the actuarial risk of an FHA loan.”

CHLA maintains that Life of Loan premiums overwhelming hurt minority, low-income, and underserved homebuyers. It recommends the Biden administration do away with these premiums to promote mortgage credit for these groups.