Loan Modification

FHA Annual Premium to Triple?

By Gina Pogol

In order to increase FHA’s capital reserves, the House Financial Services Committee approved a bill to increase the maximum annual mortgage insurance premium payments collected from 0.55% to 1.5%. When FHA increased its upfront MIP to 2.25%, it indicated that it would seek authority to increase the annual premiums charged and then request a corresponding drop in the upfront MIP. But the upfront MIP was increased by only 0.5%, from 1.75% to 2.25%. The annual MIP increase could be nearly a full percent, payable every year! That could make FHA mortgages a lot more expensive in the future.

If the agency imposed its maximum annual premium, it could cost borrowers a lot more than they pay today, making qualifying for a mortgage harder. Currently, the upfront MIP can be financed in with the rest of the mortgage and thus has minimum effect on qualifying. The annual MIP is currently 0.5%, which is less than conventional mortgage insurance (conventional mortgage insurers don’t require the upfront 2.25%). But a 1.5% annual MIP effectively adds 1.5% to the interest rate borrowers pay, every year. And it’s due until at least five years have passed AND the mortgage has been paid down to less than 78% of the original loan balance.

The bill has other provisions that could effect future FHA borrowers. The agency would also hold FHA lenders more accountable for any loans that go sideways. Under the new bill, any loans that cause losses that do not meet FHA underwriting guidelines or have fraud involved could end up being eaten by the lender that originates them. This could have the effect of making lenders raise their underwriting standards higher than FHA’s to ensure they don’t end up buying loans back. This has already happened to some extent, with many lenders imposing minimum credit scores that are far higher than FHA’s 580 floor.

The bill also increases the authority of the FHA to yank the approval of lenders. If FHA finds one of its lenders has an “excessive rate” of early defaults and claims for the area it operates in, even if the loans have been originated in accordance with its guidelines, it can pull its approval. And it can do it for all the lender’s offices in the entire nation, not just the office(s) in the region experiencing the high default rate. This could have the effect of chilling FHA lending in economically depressed areas of the country (which tend to have higher default rates), adding another obstacle to housing market recovery.

Shaun Donovan, secretary of the Department of Housing and Urban Development (HUD) is all for this new bill. “The FHA is playing a vital role in the current housing market. We must therefore remain vigilant in making sure that our reserves are strengthened and that our lenders meet the highest standards of conduct,” he said in a Housing Wire interview. “This legislation puts FHA on firmer footing to achieve its dual mission of helping to stabilize the housing market during tough times and providing affordable home ownership options to underserved American families while protecting the American taxpayer by bolstering the strength of the fund.”

We’ll see.

Full post as published by FHA Mortgage Guide on April 28, 2010 (boomark / email).