Potential cuts to FHA premiums weigh on mortgage insurers

"Current FHA premiums are 175 basis points (bps) upfront and 55 bps annually, numbers that KBW says are modestly higher than levels seen before the 2008 financial crisis. Large permanent cuts are unlikely, KBW says, but a temporary reduction, such as removing the upfront 175 bps fee for a year, is possible, as FHA's capital levels are strong enough to support a temporary cut."

"As a result, some loans could shift from private mortgage insurers to the FHA if premiums are reduced. KBW estimates that if premiums are cut, only about 20% of mortgage insurer business (loans with FICO scores below 720) is at risk of moving to FHA. The analysts said that even if half of that business moves, it will occur over multiple years and can be offset with share buybacks."

"While an FHA premium reduction is possible, we think the risk-reward on the sector looks attractive. The shares are already down by more than they fell in 2015 and 2023 when premiums were cut by 50 bp and 30 bp, respectively, the note read. Previous reductions in 2015 and 2023 seemed to have only a temporary impact on MI prices, KBW said, and did not hurt mortgage insurers' valuations or earnings."

"The note also mentioned Federal Housing Finance Agency (FHFA) Director Bill Pulte's recent appearance on CNBC, where he discussed an aggressive agenda to handle housing affordability and called out credit bureaus, mortgage insurers and title insurers. We find the discussion about [mortgage insurers] quite surprising since the companies generally earn low-teens ROEs, which is probably only a couple of points above their cost of capital, KBW stated."

Current FHA premiums are 175 basis points upfront and 55 bps annually. Large permanent cuts are unlikely, but a temporary reduction — such as removing the upfront 175 bps fee for a year — is possible because FHA capital levels are strong enough to support a temporary cut. Some loans could shift from private mortgage insurers to the FHA if premiums fall. Only about 20% of mortgage insurer business (loans with FICO below 720) is estimated to be at risk. Even if half of that business moves, migration would occur over multiple years and could be offset with share buybacks. Past premium reductions had only temporary impacts on MI prices and did not harm valuations or earnings.

Read at www.housingwire.com