Federal Housing Administration premium cuts have spurred economic growth, but borrowers with good credit can still purchase a conventional mortgage that qualifies for Fannie Mae or Freddie Mac through private mortgage insurance.
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Although private mortgage insurance companies helped nearly 800,000 Americans buy homes in 2023, they lost market share last year to the Federal Housing Administration (FHA) and Veterans Administration (VA) programs — a trend that continues Continues until Season 1, 2024.
In the wake of the 2007-09 housing crash and Great Recession, Federal Housing Administration (FHA) or Veterans Administration (VA) loans were often the best option for many homebuyers who didn’t have much saved for a down payment.
But private mortgage insurance companies – which backstop Fannie Mae and Freddie Mac when homebuyers put down less than 20% – have been trying to regain market share for a decade.
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For a time, increases in FHA premiums made private mortgage insurance a cheaper option for many borrowers. Fannie Mae and Freddie Mac programs that allow low-income homebuyers to purchase homes with as little as 3% down payments have also helped private mortgage insurance companies attract more first-time homebuyers.
First-time homebuyers will account for nearly two-thirds (64%) of loans backed by private mortgage insurance in 2023, up from 61% in 2022, according to a report released Tuesday by the U.S. Mortgage Insurance Company (USMI).
Nearly one in five borrowers (18%) who relied on private mortgage insurance to get approved last year put down just 3%, up from 11% in 2020, the report said.
Seth Appleton
“Without private mortgage insurance, too many buyers will remain on the sidelines instead of building intergenerational wealth and working toward the American dream of homeownership,” USMI President Seth Appleton said in a statement.
(USMI is a trade association representing five of the six active mortgage insurance companies in the United States—Enact, Essent, MGIC, National MI and Radian.)
Private mortgage insurers backed nearly $1.6 trillion in home loans last year, after insuring $283 billion in new mortgage originations, including those guaranteed by Fannie Mae and Freddie Mac of $1.4 trillion in mortgage loans.
FHA and VA regain market share
Source: Inside Mortgage Finance and Urban Institute.
Claim losses following the Great Recession of 2007-2009 made it difficult for private mortgage insurers to write new policies.
However, in 2009 and 2010, private mortgage insurance companies gradually pulled back some business from the FHA and VA loan programs after their market share of insured mortgages fell below 20%.
From 2008 to 2013, annual premiums on FHA loans rose from 50 basis points to 135 basis points as the Obama administration dealt with losses, leading to a $1.69 billion bailout of the FHA Mutual Mortgage Insurance Fund in 2013.
Private mortgage insurance companies’ share of the mortgage insurance market has grown steadily and will rebound to nearly 50% by 2022.
But as the economy improved and the FHA program resumed, the Obama administration was able to cut annual FHA premiums by 50 basis points in 2015. Analysts at the More Attractive Cities Institute said that “for most borrowers, the down payment ratio is less than 5%.”
Private mortgage insurers’ market share of insured mortgages fell to 40.1% in the first quarter of 2024 from 47.3% in the first quarter of 2023, according to data compiled by Inside Mortgage Finance and the Urban Institute.
Of the $145 billion in mortgages originating from some kind of insurance in the first quarter of 2024, private mortgage insurers still backed the largest loans, totaling $58.2 billion.
However, FHA’s market share grew from 29.9% in the first quarter of 2023 (annual premium reduction of $678 million annually) to 36.4% in the first quarter of 2024.
Analysts at the Urban Institute calculated that borrowers with FICO scores below 740 would find FHA financing a better deal with a 3.5% down payment.
But borrowers with FICO scores above 740 would be better off purchasing a conventional mortgage that qualifies for Fannie Mae or Freddie Mac through private mortgage insurance.
The Urban Institute said the calculations reflect not only last year’s reduction in FHA premiums but also changes in the upfront fees lenders pay when they sell mortgages to Fannie Mae and Freddie Mac that are designed to help low-income borrowers.
Another disadvantage of an FHA loan for borrowers with less than 10% down is that the only way to get out of paying mortgage insurance premiums is to refinance from an FHA mortgage or sell the home.
Mortgage industry groups have urged the Department of Housing and Urban Development to waive “loan life” premium payment requirements, but so far HUD remains intent on rebuilding the FHA’s Mutual Mortgage Insurance Fund to prepare for the next recession.
FHA annual mortgage insurance premiums were cut by 35% last year, and with 2024 FHA loan limits rising to a minimum of $498,257 in the affordable market and $1.72 million in high-cost states like Alaska and Hawaii, total insurance in effect is growing rapidly than reserve.
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