FHA Insurance Premiums Set For Fall Revamp

Borrowers who get FHA financing after October 4th will be subject to a new insurance fee schedule — with some costs rising and some falling.

The FHA has two insurance premiums. There’s an up-front mortgage insurance premium (MIP) paid at closing (or added to the loan amount) which is now equal to 2.25 percent of the mortgage amount. There is also an annual mortgage insurance premium which is currently .55 percent of the unpaid mortgage balance.

Under the new schedule the up-front fee will be reduced to 1.00 percent. This means FHA borrowers will need considerably less cash at closing.

However, what the FHA losses up-front will be made up over time. The annual MIP will be increased from .85 percent to .90 percent of the outstanding loan amount.

To see how the fees compare, consider someone who wants 30-year FHA loan for $150,000.

  • Under the current system the borrower would have a $3.375 fee up from. For borrowers after September the fee would drop to $1,500.
  • Under the current system the borrower would have an annual MIP equal to .55 percent of the loan amount. In this case the monthly cost would be $68.75 ($150,000 x .55/12), but decline gradually as the outstanding mortgage balance falls.

Who Wins, Who Loses

The FHA has been criticized because it exists (some pundits dislike the program because it is, after all, a government insurance plan) and because it faces big claims against its reserves (as if other mortgage insurance plans do not). The new insurance fees deftly deal with a number of issues.

First, the new fees will reduce the cash required for closing, meaning that more buyers can get into the marketplace, precisely what’s needed at this time.

Second, the new fees are expected to generate an additional $300 million a month, or $3.6 billion per year.

Third, the new premium system is hardly a surprise — we wrote about it in May!

Fourth, the new measures come at a time when the FHA is actually doing quite well.

How well? HUD reports the following recent results:

  • The quality of loans made in 2009 and 2010 — the years FHA has done the most significant volume –is much improved.
  • The average credit score on current insurance endorsements has risen from 634 in 2007 to nearly 700.
  • Actual claim payments to-date are $3.7 billion lower than projected by the independent actuary.
  • Loan performance, as measured by serious delinquency and early period delinquency rates, has improved significantly, with the first year-over-year decline in new 90-day delinquencies in years.
  • Cash flow is positive, with the most recent quarter having a net increase of $446 million.

The Need For New Fees

While the FHA reserve (the Mutual Mortgage Insurance Fund) is doing well now, the economy remains troubled. Unemployment officially remains near 10 percent — unofficially it’s higher. And foreclosures remain a stubborn problem. RealtyTrac reports that among major metro areas, 154 of 206 saw foreclosure increases during the past year.

In effect, the FHA is bulking up its reserves while at the same time making the program more attractive to borrowers.

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Posted in: Mortgages

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