Compass Point analysts set odds of additional cut at 60%
June 1, 2016 Ben Lane
Early last year, the Obama Administration shook up the
housing world when it ordered the Federal Housing Administration to cut its
annual mortgage insurance premiums by 50 basis points, from 1.35% to 0.85%.
The effect of the cut was widespread and significant, as
the FHA’s mortgage insurance business exploded in 2015 and the FHA actually
reached its Congressionally mandated threshold of 2% on its flagship Mutual
Mortgage Insurance Fund years ahead of the FHA’s own predictions.
But is the FHA about to do it again? That’s the
scuttlebutt around Washington, according to analysts from Compass Point
Research & Trading, and the noise surrounding another cut is apparently
getting louder.
In the wake of the January 2015 cut to the FHA’s
premiums, many observers expected a negative effect on the FHA’s MMIF,
considering that less money paid out in mortgage insurance premiums would
theoretically lead to less money being funneled to the FHA’s flagship fund.
But that’s not what happened, as the FHA announced in
November that the MMIF grew significantly in fiscal 2015, reaching its
Congressionally mandated threshold of 2% well ahead of schedule, climbing from
its 2014 level of 0.41% to 2.07% in 2015.
After the FHA released its 2015 actuarial report,
opinions and analysis came in from all sides, with some calling for more cuts,
while others argued that the FHA should wait to build up even more capital in
its reserves.
In November, Barclays’ Sandipan Deb and Anuj Jain said
that the “headline number” of the FHA’s report does not actually reflect the
“deterioration” in the FHA’s portfolio due to the premium cut, but despite
that, the FHA is still more likely to cut the premiums again, citing the FHA’s
positive spin on the report.
Other analysts, including Compass Point’s Isaac Boltansky
and Amy DeBone said in November that the probability of a further FHA rate cut
was 20%, but according to a new report from those same analysts, the likelihood
of a further cut to FHA premiums is significantly higher now than it was in
November.
“While the policy argument for lowering FHA mortgage
insurance premiums appears premature given the state of the MMIF and the FHA's
current market share, conventional wisdom in D.C. has shifted toward expecting
another rate cut announcement this year,” Boltansky writes in new Compass Point
note.
According to Boltansky, after conversations with clients
and other observers in and around Washington, Compass Point now places the probability
of a further cut to FHA premiums this year at 60%, although Boltansky notes
there is no consensus about what the structure of the potential cut will be or
when exactly the announcement is coming.
There is some thought, Boltansky writes, that the
announcement of an additional FHA premium cut would come before November’s
Presidential election, in order to “ensure the maximum political benefit.”
Others argue that the next round of cuts will be
announced after the FHA releases its 2016 actuarial report in mid-November,
potentially mere days after the November 8 election.
As for the structure of the cut itself, Compass Point
said that based on its conversations, it’s more likely that the FHA will cut
its annual mortgage insurance premium by roughly 30 basis points, back to its
pre-crisis level of 0.55%, which is exactly what the Community Home Lenders
Association asked the FHA to do in October.
Compass Point noted that another potential cut could be a
50-basis point cut to the FHA’s up-front mortgage insurance premium, which
would go into effect in 2017.
According to Compass Point, those cuts could be an
either/or situation or both could be enacted simultaneously, cutting the FHA’s
MI premiums even further.
One item that’s off the table, according to Compass
Point, is any change to the FHA’s mortgage insurance life-of-the-loan policy,
just as, Ed Golding, who serves as the head of the FHA, said earlier this year.
In February, Golding testified before a House Financial
Services subcommittee and said that the FHA is “not considering” any changes to
the life-of-loan policy.
But according to Compass Point, other changes to the
FHA’s policies are certainly being considered and potentially coming soon.