It’s a catchy marketing pitch: “720 and above, don’t go gov.”
And it has potentially far-reaching significance not only for large numbers of first-time and moderate-income home buyers this year, but for the dominant source of low down payment mortgages many buyers depended on during the past several years: FHA.
The new “720″ jingle, used in advertisements by Radian Guaranty Inc, one of the highest-volume players in the industry, refers to FICO scores and spotlights the steadily rising cost of FHA insurance premiums compared with private competitors.
As the result of those fee increases — the most recent hike in premiums took effect April 1 — and the impending revocation of the right to cancel premiums for most new FHA borrowers starting June 3, private mortgage insurers can now offer much more attractive deals to the most creditworthy homebuyers than FHA.
That has long-time advocates of FHA — and privately, some federal officials — concerned about adverse selection. Private insurers appear likely to start “creaming” the best of FHA’s current customer base — the low credit-risk, 700+ credit score borrowers who have provided the bedrock for FHA’s vaunted, high quality 2010-12 books of new business, which Commissioner Carol J. Galante calls “the strongest in agency history.”
This, in turn, could leave FHA with a preponderance of borrowers who have the lowest scores and present the highest risk of future default and foreclosure — a trend that could put new strains on the agency’s insurance funds and eventually increase the odds that it may need to either seek a Treasury bailout or raise fees again to pay for the losses.