Loan Modification

What FHA Obama reforms would really man

By Peter G. Miller

A few days ago we reported that the new Obama mortgage plan would increase the cost of FHA mortgages while reducing maximum loan sizes.

But would such changes be so terrible? Would borrowers really suffer?

The answer is yes, more or less. It’s the “more or less” that’s interesting.

Let’s start with loan limits. Under the Obama plan the current loan limit should be reduced from $729,750 ? the amount for a single-family residence in a ?high cost? area ? to $625,500.

Truth is, most borrowers won’t care. In December, HUD reported that 133,603 FHA forward mortgages worth $26.4 billion were endorsed. This means the typical FHA loan had a principal balance of $197,600.

Mortgage Insurance Premium

The deal with the MIP is different. Here’s why:

Under the Obama proposal the upfront mortgage insurance premium — the MIP — will stay the same, 1.0 percent for most borrowers. With a loan for $197,600 that is a cost of $1,976, an expense which can be added to the loan amount.

The annual MIP will go from .90 percent to 1.15 percent with a .25 percent increase (or, 25 basis points in the fancy language of the proposal).

For an outstanding balance of $197,600 the annual MIP would be $1,778 a year or $148 per month under the old schedule.

Under the proposed schedule, the MIP for the same loan would be $2,272 or $189 a month.

That’s an increase of $41 a month. Is this important to borrowers?

For some buyers, this increase is very important.

As the Obama proposal says, the FHA is “a targeted provider of mortgage credit access for low- and moderate-income Americans and first-time homebuyers.” In other words, not too many FHA mortgage borrowers are rich or famous.

For individuals without the benefit of wealth or large incomes affordability is a serious matter. Combine costs for a car, school debts and credit cards and a lot of people do not qualify for financing. Make FHA loans more expensive and the pool of qualified borrowers will inevitably shrink.

The government, says the proposal, must “help ensure that all Americans have access to quality housing that they can afford. This does not mean our goal is for all Americans to be homeowners. We should continue to provide targeted and effective support to families with the financial capacity and desire to own a home, but who are underserved by the private market, as well as a range of options for Americans who rent their homes.”

But raising FHA costs means that the housing people “can afford” is now more expensive. Higher costs for FHA mortgages do not increase “credit access for low- and moderate-income Americans and first-time homebuyers.” No economist on the right or the left would agree with the idea that higher costs boosts access to credit. They would all talk about the marginal cost of capital and how higher costs reduce demand.

Full post as published by FHA Mortgage Guide on February 16, 2011 (boomark / email).