This morning FHA Commissioner David Stevens told a couple of thousand realtors at a conference in Washington, DC that there is "no end in sight" to the growing number of FHA loans.
When I interviewed him about a half hour later, and asked him how, if that's the case, the private mortgage insurers can get back on their feet, he backpedaled.
"There is an end in sight, but most importantly, to get private capital back in comes two ways. One we have a bill in Congress right now that we need to get through because we have to change our fee structure to be more in line with how private mortgage insurance price. We think its critical to make an opportunity for the private sector to return within a reasonable standards but that also doesn't come without other participants beginning to behave in a way that allows the private sector to return as well," Stevens said.
According to new numbers yet to be released publicly by Inside Mortgage Finance, private mortgage insurers like PMI Group , Genworth and MGIC , had a 77 percent market share before the housing crisis. Today that share is down to 12 percent. Translate that into real dollar figures, and that's $510 billion in lost business. After taking huge losses on bad loans, they are now trying to dust themselves off and get back in the game. One way of doing that is to ease some of the new standards the MI's put in place in distressed markets like California, Florida, Arizona and Nevada.
I spoke with folks at PMI yesterday who told me they are dropping FICO scores by a little, raising LTV's by a little and getting back into jumbo conforming loans in the distressed markets (loans between $417,000 and 729,000).
I asked Commissioner Stevens if this is the right strategy:
"We are not asking the private sector to ease anything, what we do believe is people price based on foreseeable risk, and when you are in a market where home prices are progressively declining, 30 months of straight declines in home prices since august of '06, which now has begun to stabilize, they are going to price that risk in; as the markets recover, we believe they will start pricing appropriately."
The trouble is that the mortgage insurers business competitiveness is tied to the government's housing bailout, and not in a good way. It's not just the FHA, it's Fannie and Freddie.
"While MI pricing is comparable to FHA, the GSEs add-on fees (loan level price adjustments) are much more costly than Ginnie Mae fees, FHA’s secondary market outlet," says Brian Chappelle, a mortgage analyst. "The MIs were and are reluctant to speak out because of their own situation over the last two years. They really weren’t in a position to do new business. Now they are but GSE pricing policies are constraining them."
The good news, he tells me, is that there have been two positive capital “raises” in the last two weeks (PMI and MGIC). But, again, the cost structure of the GSE's is funneling business to the FHA, and in many cases pricing the MI's out.
Stevens kept talking about outside investors getting into the market again and helping to stabilize the costs and pull share away from FHA. He also admits the FHA is going to maintain its volume levels for a while until capital comes back.
When I suggested to him that it was government again, Fannie and Freddie and their higher costs, pushing private mortgage insurers out, he could say only: "It's a challenge."
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