The reserve fund the Federal Housing Administration (FHA) holds to cover losses—the Mutual Mortgage Insurance (MMI) Fund—is substantially overfunded (PDF), and some housing experts have called for cutting the monthly mortgage insurance premium (MIP) borrowers pay into the MMI Fund. But cutting the monthly MIP will not lead to lower mortgage payments for FHA borrowers, and with the limited supply of affordable homes on the market, the cut could lead to home price increases.

My colleagues at the Urban Institute have proposed another solution: a targeted cut in the monthly MIP for borrowers taking out smaller mortgages. Although a targeted MIP cut won’t have the systemic inflationary impact that an across-the-board cut would have, it’s likely the average FHA borrower will still channel the targeted MIP cut into greater purchasing power, given today’s overheated market.

Instead of an across-the-board or targeted cut, I believe policymakers can enact three short-term solutions that can address the surplus of MMI reserve funds and help homebuyers build wealth.

For policymakers who want to reduce or eliminate the MMI Fund’s ever-building surplus but still maximize value for the homeowner, the current tight housing supply requires more creative thinking. From my analysis, I believe the following three policy changes can slow or eliminate the growth of the MMI Fund surplus, benefit homeowners, avoid putting further pressure on the housing market, and be immediately implemented by the FHA.

  1. Institutionalize pandemic forbearance policies, and allow short-term financial distress to be treated like a disaster. 
  2. Eliminate the up-front MIP.
  3. Reduce the monthly MIP of borrowers who make consecutive timely payments. 

Read the full article about supporting homeowners by Ted Tozer at Urban Institute.