Potential cuts to FHA premiums weigh on mortgage insurers

Shares in publicly traded mortgage insurance companies dropped between 5% to 8% in a single day and are down by 5% to 12% so far this year, according to an investor note published Tuesday by Keefe, Bruyette & Woods (KBW).

KBW analysts Bose George and Frankie Labetti explained that the main concern appears to be tied to a proposal that would reduce mortgage insurance premiums (MIP) on Federal Housing Administration (FHA) loans as part of a push by the Trump administration to improve housing affordability.

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.