FHA's Lower Premiums Boost Loan Demand

Recent actions by the Federal Housing Administration to reduce its mortgage insurance premiums is giving its loan volume a major boost, particularly with a "significant uptick in refinancings," Julian Castro, Department of Housing and Urban Development Secretary, said before the House Financial Services Committee.

Castro said that FHA was on track to also reach its 2 percent statutory capital minimum within two years. FHA is required by law to have at least 2 percent in capital reserves, but was at 0.41 percent as of November last year.

Read more: FHA Lowers Its Mortgage Costs

"With the limited data we have, we believe we are on track," Castro told lawmakers. He said final numbers would be available in November.

In January, the agency decreased its annual premium by 50 basis points, which has helped to propel loan originations and recapture rates. FHA loan demand also seems to not only be benefiting from the recent premium reduction but also from an improving economy and falling delinquency rates, the National Mortgage News reports.

According to FHA's latest data, FHA loan endorsements climbed from 50,411 in February to 83,440 in March. A majority of that increase was driven by a spike in refinancings.

Mortgage volume for purchase loans surged 23 percent to 45,571 loans in March compared to a month earlier, according to FHA’s Production Report.

Some critics have said that FHA's reduction in premiums would delay it from meeting the recapitalization of FHA's insurance fund. But Castro said the reduction has boosted lending and it will meet the required rate. He also argued that FHA reduced its premiums in order to make loans more affordable; it has not reduced its credit standards.

"We still have historically a fairly average high credit score for FHA-insured loans of 677," Castro said.

Source: "FHA Charts Recovery After Premium Cut," National Mortgage News (June 11, 2015)