As the market continues to fluctuate, it is prudent for the Federal Housing Administration (FHA) to take appropriate action to support homebuyers and reduce the Mortgage Insurance Premium (MIP). Traditionally, FHA-backed mortgages serve borrowers with low to moderate incomes by providing mortgage insurance with less stringent credit and loan-to-value (LTV) requirements at the time of purchase. To fund the program, the FHA collects upfront and annual premiums that usually last the entirety of the loan, which is a deterrent that can turn buyers away from participating in the program.
Critics of reducing the MIP point to the signs of a slowing economy, claiming that reducing premiums for riskier, government-backed loans should not come at a time when there is uncertainty in the marketplace. Despite those claims, FHA’s capital ratio is currently at 8%—6% above what is required by Congress, and data show that “serious delinquencies” as of May 2022 sit at 4.53%, the lowest they’ve been since May 2020. If delinquencies rise and the private market pulls back, the FHA is the only agency uniquely tasked with supporting the market during a crisis, and it is in a financial position to support the purchasing power of entry-level homebuyers.
Critics also warn that reducing the MIP will overstimulate demand and drive up home prices in a market strapped for supply. However, the sharp drop in affordability has increased relative supply. If we are truly striving toward creating homeownership opportunities for all, low- to moderate-income and first-time homebuyers should not be forced to shoulder the consequences of market conditions they did not create. Rather, they should be encouraged to participate with the financial support of the FHA or supported by reducing the cost of homeownership through a program like Homeowners Armed With Knowledge.
For the FHA to successfully carry out HUD’s mission of providing quality affordable housing, we strongly urge them to reduce the MIP so that everyone, specifically credit-worthy buyers from low- to moderate-income backgrounds and first-time buyers, can achieve the American Dream and begin building generational wealth. This, on top of other immediate actions like streamlining the 203(k) loan program, reducing requirements for condominium spot loans and allowing borrowers to purchase more affordable flood insurance coverage from the private market, is an immediate action the FHA can take to keep serving out its mission.
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Jeremy Green is the Federal Housing Policy Representative with the National Association of REALTORS®, where he works on issues and programs related to the Department of Housing and Urban Development, including the federally assisted housing programs, the VA, Federal Housing Administration and USDA Loan Programs.