Barclays estimates that mortgages being refinanced from Federal Housing Administration-backing to private-insured loans currently account for about 20% of all FHA refinance activity, according to a recent report.However, improving home prices and increased PMI availability could further open up a refinancing outlet for certain FHA borrowers over time.”This would erode the call protection afforded by mortgage insurance premium protected collateral. It would also provide a boost to discount Ginnie Mae speeds in a rates sell-off scenario,” said analysts Nicholas Strand, Wei-Ang Lee, Sandipan Deb and Rohan Joshi of Barclays

Rising FHA premiums sharply improved Ginnie Mae convexity [sensitivity to interest rate changes], but MIP protection is likely to deteriorate over time driven by a competitive private mortgage insurance market and an improving home price appreciation environment, Barclays noted.“The simple reason for this is: higher premiums increase the attractiveness of other mortgage options that have lower ancillary fees. Specifically, for FHA borrowers that qualify, we believe a conventional loan (with private MI if needed) will become an increasingly viable refinancing outlet over time,” the analysts said

Historic high in FHA mortgage premiums has significantly increased the MIP hurdle in a refinance transaction. As a result, this hurdle is one of the defining factors of the Ginnie Mae prepayment landscape over the past few years, according to Barclays.However, similar to Making Homes Affordable, some of this call protection will erode over time. Given the high costs of an FHA loan relative to a conventional loans with private mortgage insurance, “FHA borrowers have considerable incentive to refinance conventionally,” Barclays stated.There is evidence that FHA to conventional refinances beginning to grow, Barclays said.For instance, PMI originations are rapidly increasing market share relative to FHA. Additionally, the number of FHA loans that refinance is currently outpacing those endorsed, which is another sign of growing FHA-to-conventional refinances, according to the research firm.

Follow