Even as the market overlap for low down payment loans has diminished between conforming and government executions, the private mortgage insurance industry has marketed that its product is cancellable.

But a bipartisan bill introduced during the lame duck session in the House of Representatives seeks to change the Federal Housing Association’s rule that required life-of-loan premiums for its mortgage insurance coverage.

While the bill’s opportunities for passage any time soon is unlikely, it is still a slight negative for the private mortgage insurers because if it does come to fruition, it would make the FHA program “a little more competitive,” said Bose George, an analyst at Keefe Bruyette & Woods. Borrowers pay an upfront premium for the FHA coverage, as well as an annual one.

However, when the FHA annual mortgage insurance premium was reduced in February 2023 to 55 basis points, while some loans opted for the government program, the shift was not huge, largely because of tighter conforming underwriting rules.

The share of borrowers taking FHA over conventional has been growing, according to rate lock data from Optimal Blue.

FHA was the only entity to gain market share on a month-to-month basis, rising 73 basis points from October to 20.4% of all loans originated during November.

Conforming slipped to 52.7%, a loss of 10 basis points and nonconforming was at 14.9%, down 21 basis points. Of the other government product types, Veterans Affairs’ share of 11.4% was 35 basis points lower, while the U.S. Department of Agriculture loan locks were 6 basis points lower at 0.6%.

Right now, FHA is picking up some business from the conforming market, primarily cash-out refinancings, George said, as that particular product ” is hard to do with the GSEs for that cohort of borrowers. About half the FHA cash-out refi activity is coming from the conventional market.”

Approximately one-quarter of the FHA volume is refis, and half of that is coming over from the conforming market.

Furthermore, the FHA program also gets strong use from the homebuilder community.

“Obviously, the builder share has grown during this downturn, and so I think that’s probably one of the drivers of the shift as well,” George said.

But as the housing market recovers, the private mortgage insurers be better positioned competitively than FHA, he continued.

The life-of-loan rule went into effect in June 2013, at a time when the FHA’s Mutual Mortgage Insurance Fund was financially distressed because of the housing crisis.

Previously, the FHA policy, which it introduced in 2000, automatically canceled mortgage insurance once the loan-to-value ratio reached 78%.

Private MI companies are required by the Homeowners Protection Act of 1998 (and implemented the following year) to cancel the coverage at a 78% LTV; borrowers can request it be eliminated when it reaches 80%.

Since then, the MIs have marketed this as a competitive advantage, even as the consumer market between two products has diverged.

If passed, the change will make homeownership more affordable and save borrowers hundreds of dollars annually, Rep. Gregory Meeks, D.-New York, one of the co-sponsors, said in a press release.

“This legislation is designed to help Americans keep more of their hard-earned money in their pocket and make home ownership more affordable,” Meeks said. “The Mortgage Insurance Freedom Act will empower first-time buyers and young families to get ahead by reducing monthly payments and encourage faster equity accumulation.”

Working with Meeks is Rep. Pete Sessions, R.-Texas.

“By addressing a key inequity in the FHA system, this bill rewards financial responsibility and empowers homeowners across the country,” Sessions said in the Meeks release.

Others quoted in the release are Brendan McKay, chief advocacy officer at the Broker Action Coalition, Patrice Willoughby, NAACP chief of policy and legislative affairs, and Anneliese Lederer, senior policy counsel at the Center for Responsible Lending.

McKay posted the release on LinkedIn and also thanked Meeks for introducing the bill.

In a follow up statement to National Mortgage News, McKay added “It is our hope that this bill will receive full industry support.

“As stewards of the industry, it is the BAC’s obligation to advocate for any legislation that positively impacts homeowners in a significant manner. The Mortgage Insurance Freedom Act checks that box and has our full support.”

The organization now known as the Community Home Lenders of America has been arguing for the life-of-loan policy to be repealed almost since when HUD first put it in place, Scott Olson, executive director said.

While that won’t have the same impact on the program as the MIP reduction, which affected underwriting, a change in this area will benefit both lenders and consumers when it comes to product competition.

“We find that people are marketing against FHA,” Olson said. “They say you don’t want to do FHA because you’re going to pay the premiums for the rest of your loan term.”

Fannie Mae and Freddie Mac already have a competitive advantage in the marketplace because their offerings are typically priced better, even on low down payment loans.

“You’re always going to have that difference, but this attribute will no longer be in play that works adversely against FHA,” Olson noted.

It’s also a matter of fairness. Several years ago, CHLA did some calculations that found FHA borrowers repaid over what their risk profile showed at least three or four times more, Olson said. “So to charge them for another 20 years seems unconscionable, because you’re just way overcharging them, and so this interferes with their ability to build equity and build wealth.”

He did point to the counterargument that the loans have default risk, but responded that by that point the borrower has overpaid for that looking at things on an actuarial basis.

The Mortgage Bankers Association pointed to comments from CEO and President Bob Broeksmit following release of the MMIF actuarial report in November that showed the fund’s capital ratio was a rather healthy 11.47% for fiscal year 2024.

This compared with 2.1% for fiscal year 2015.

“In addition to pursuing more program enhancements to boost housing supply and affordability, such as this year’s 203(k) program updates, borrowers would see meaningful payment relief from FHA eliminating its life of loan premium requirement and making another reasonable cut to the MIP,” Broeksmit said in November.

“MBA will work with the Trump administration and Congress in 2025 on policies and program enhancements to increase housing supply and lower costs for consumers while protecting taxpayers.”

US Mortgage Insurers, the group representing most of the private underwriters, had not responded to a request for comment by press time.