18 MAY / JUNE 2023 DIRECTORS / SENIOR MANAGEMENT Andrea F. Pringle Financial Strategist & MBS Analyst The Baker Group APringle@GoBaker.com The Baker Group is a Preferred Service Provider of the Indiana Bankers Association and an IBA Diamond Associate Member. The Federal Housing Administration (FHA) recently announced a decrease to the annual premium charged to borrowers with FHA-backed loans. The reduction goes into effect for newly originated purchase or refi loans endorsed on or after March 20, 2023. This annual premium, called the mortgage insurance premium (MIP), is a monthly fee that FHA borrowers pay into the fund that insures FHAbacked mortgages, the Mutual Mortgage Insurance Fund (MMIF). This fund exists to guarantee lenders against loss for loans made under the FHA mortgage program. FHA mortgages are considered higher-risk because the program permits low down payments and less stringent credit qualifications than conventional home loans backed by Fannie Mae and Freddie Mac. The guarantee gives lending institutions comfort extending credit to borrowers who might not otherwise qualify for a home loan and enables them to offer these borrowers better terms. In order to fund the MMIF, FHA borrowers pay a monthly fee: the annual MIP multiplied by their loan amount (divided by 12 to arrive at a monthly amount). Prior to the recent cut, the annual premium was between 80-105 bps, based on the size of the loan and the Loan-to-Value (LTV) ratio. The new premium is 50-75 bps, a 30 bp decrease across the board. For most borrowers the fee is either 50 or 55 bps. These fees amass in the MMIF and are used to cover any losses in the event of default by an FHA borrower. This was especially important when a wave of mortWhat the MIP Cut Means to MBS Investors gage defaults associated with the Great Financial Crisis hit the fund beginning in 2008. By 2009, the fund’s capital ratio fell below its statutory minimum of 2.0% and stayed below that level until 2014. Since then, the MMIF has grown substantially, especially over the last few years when record home-price appreciation, a housing boom and significant refinance activity drove more funds into the system. By November 2022, the MMIF reported a record 11.11% capital ratio. Speculation about a cut to the MIP had been swirling for more than a year as the fund got larger and larger. By late February 2023 when the cut was announced, the move had been well telegraphed to the market and the cut largely priced in. Given how well advertised the cut was and how little of the mortgage universe is in-the-money to refinance, the cut may not mean much to mortgage-backed securities (MBS) investors in the near term. In a more normal interest rate environment, the effect of reducing the MIP would be faster prepayment speeds on Ginnie Mae MBS (FHA mortgages are securitized into Ginnie Mae MBS). This is because borrowers would be incentivized to lower their monthly mortgage payment by refinancing their loans with a new FHA mortgage tied to the lower MIP. However, today’s prevailing mortgage rates are so much higher than most existing mortgages, which were originated with historically low rates over the last few years, that this exercise will not save most borrowers money. A 30 bp cut to the MIP simply is not enough to offset newer mortgage rates that are 300+ bps higher. Further, in order to qualify for a streamlined refinance of an FHA
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