FHA doesn't want to crowd out the return of the private market

FHA Shying Away from Risk-Based Pricing

December 2, 2009

The Federal Housing Administration wants to stay
away from traditional risk-based pricing for mortgage
insurance premiums, saying it doesn't want the government
to compete against private sector MI firms. Lowering prices
for the least risky borrowers could have the effect of
"potentially crowding out the return of a private market"
or delaying its return, HUD secretary Shaun Donovan told
a congressional panel. FHA officials are planning to raise
the upfront premium or the annual premium - or both. The agency
willunveil details of their proposal in January. In determining
the premiums, they want to employ some combination of credit
scores, loan-to-value ratios and other underwriting criteria
that would limit the entry of the riskiest borrowers into
the FHA fund. For example, FHA might raise the downpayment
for borrowers with low FICO scores. "We also have to be careful
about overpricing risk," secretary Donovan testified. He noted
new FHA originations are "quite profitable."