Private Mortgage Insurance Attracts More FHA Clients in Q2

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The growth gap between private mortgage insurance and FHA loans continued to widen in the second quarter as a government agency tightened its underwriting standards in the wake of the pandemic.

However, the rate that PMI is adding to existing insurance should slow in the next two years, but it should still exceed the expected percentage increase in outstanding mortgage debt, Keefe, Bruyette & Woods said in a report.

Valid PMI insurance on June 30 grew 2.7% over the first quarter and 9% over the previous year. This is comparable to a decrease in IIF. in FHA 0.9% and 3.2%, respectively.

“While we believe first-time home buyers are in high demand, this cohort has struggled in a competitive housing market,” KBW analyst Bose George said in a report. “We believe that borrowers with lower credit quality using FHAs were likely to have been disproportionately less successful in winning bids as home sellers select buyers with higher creditworthiness (the average credit rating is 675 for FHAs versus 750 for sponsored businesses. government) and lower funding requirements (average cost of credit is 95% for FHA versus low 80% for GSE) ”.

The penetration rate of PMI with new borrowers exceeds the growth in net mortgage loans issued. The total outstanding mortgage debt as of June 30 was $ 11.44 trillion, up 1.3% from the first quarter and 5.2% from the previous year, according to the Mortgage Bankers Association.

The total outstanding mortgage insurance as of June 30 was $ 2.55 trillion, of which $ 1.35 trillion was received from private mortgage insurers (including a small amount remaining in outstanding ledgers in Triad, PMI and RMIC, which are in redemption status ) and $ 1.2 trillion in FHA.

In the four years before the pandemic (2016-2019), current PMI insurance grew by an average of 10% per year. But last year this figure dropped to 8%. Looking ahead, George expects IIF growth to be 8.8% this year and then decline to 7.5% in 2022 and 5% in 2023.

The MBA expects mortgage debt outstanding to be $ 11.76 trillion by the end of 2021, rising to $ 12.24 trillion next year and $ 13.1 trillion in 2023.

“For private MIs, the same tailwinds remain: 1) Strong demographic trends with the greatest subset of the population reaching the age of typical first home buyers; 2) very strong rise in house prices decreases availability, which increases demand for MI, all other things being equal, since borrowers are less likely to be able to afford a 20% down payment to avoid MI, ”said George.

This projection does not include any potential growth due to the upcoming change to Fannie Mae’s recommendations to allow rent as part of an underwriting decision.

Fannie reported that in a recent sample of non-homeowners who were not approved through the Desktop Underwriter, 17% of that sample would be eligible if their rental history was reviewed, George said. “So this underwriting change could bring borrowers to the border between FHA and GSE, which will be another tailwind for PMI growth.”

Meanwhile, the Biden administration’s FHA cuts in mortgage insurance premiums are still a very real possibility, according to George.

“We believe that a 25 basis point cut could occur after the end of the FHA fiscal year (September 30), followed by the release of its annual report, which includes capital levels, in mid-November. This timetable assumes that a potential reduction in premiums could occur in early 2022, ”he said.

George, however, reiterated his belief that a cut of this size only affects fields market, which could cause a “single-digit average percentage shift” in PMI customers in favor of FHA. Even in the unlikely event of a 50 bp cut. only 10% to 15% of low down payment home buyers will switch to an FHA product.

“With the delinquency / abstinence rate still high, we expect FHA to remain prudent in maintaining adequate capital buffers until its lending terms are revalued after FHA deferrals end over the next several quarters. (June 30, 2022 is the final expiration date, although most plans will end earlier), George said.



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