FHA Mortgage Insurance Goes Discount

Discounted FHA mortgage insurance will soon be here, at least for some homeowners. Borrowers with older FHA loans are about to get access to a new program that could save them big money.

According to the White House, “the FHA currently charges an up-front mortgage insurance premium of 1% of the borrower’s loan balance and an additional 1.15% of the balance per year. FHA is reducing the up-front premium to .01% for streamlined refinancings of loans originated prior to June 1, 2009 and cutting the annual fee for these refinancings in half, to .55%.

Let’s say that you now have a $200,000 FHA mortgage outstanding. The FHA’s annual insurance premium (MIP) is 1.15% per year. That means the cost to the borrower is roughly $2,300 annually.

Under the new White House plan if you refinance the new upfront MIP will be just .1 percent of the loan amount, essentially the cost of two movie tickets. Next, the annual MIP will be reduced to just .55 percent which means the yearly insurance cost will be roughly $1,100 — a savings of $100 per month or $1,200 in our example.

This is a substantial savings for most households and the White House estimates that 2,000,000 to 3,000,000 borrowers will be able to take advantage of the lower insurance costs.

However, the new proposal does raise two issues.

FHA Mortgage Insurance

First, less money from FHA mortgage insurance will be flowing into the reserve pool, the Mutual Mortgage Insurance Fund. This is money which the FHA uses to pay lender claims when a home has been foreclosed. There has been a lot of debate concerning the size of FHA reserves because they are well below the 2 percent minimum required by Congress. Cutting FHA insurance premiums for millions of borrowers is great for homeowners and it’s also good for the FHA program in the sense that lower ownership costs mean less risk. At the same time, the lower rates will simply mean fewer dollars being set aside for claims and that could be a problem going forward.

Second, the use of the June 1, 2009 cutoff date means that the new plan is plainly aimed at established FHA borrowers who have made their payments. It would be great if the FHA developed a parallel program so that once a borrower has had an FHA loan for three years their mortgage insurance payments would automatically go down.

In effect, there would be a reward for borrowers who do what they’re supposed to do. Not only would they get to keep their houses but their monthly costs would go down in a visible way.

It’s easy to understand that the government wants to overcome the toxic loan environment created before 2009 under the Bush Administration. But the fact is that FHA loans were never toxic. FHA mortgages have always had strong underwriting standards that have protected the system and keep mortgage rates low. The real problem with the FHA program is not that some loans fail it’s that claims are bigger than they used to be because home values have gone down — and home values have gone down because lenders in the private sector made huge numbers of toxic mortgages.

It’s good to see a government program that helps borrowers on Main Street really benefit. The next step should be to extend the benefit to all Main Street borrowers who have been making their FHA payments in full and in good faith for several years.

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