Borrowers will pay more to get an FHA loan in 2012. The much-heralded payroll tax cut worked out by Congress will also raise the cost of an FHA mortgage by at least .2 percent and probably more in 2012.
Think of it as a back-door tax increase. While the public was watching the payroll debate in Washington Congress was actually increasing the cost to finance or refinance a home.
The Temporary Payroll Tax Cut Continuation Act of 2011 was widely applauded because it prevented the Social Security withholding from increasing to 6.2 percent from 4.2 percent of wages. However, the extension is only for two months and is set to end as of February 29, 2012. In other words, the payroll tax debate will be renewed once Congress returns from the mid-winter recess.
New Borrower Costs
Buried in the payroll compromise are new costs for borrowers. Specifically, these new costs come in two forms.
First, Congress has directed Fannie Mae and Freddie Mac to increase the fees lenders pay by ten basis points or .10 percent. This new cost — called the g-fee — will begin April 1, 2012.
This increase is substantial. According to Market Watch, lender fees now amount to .26 percent of the loan amount. The congressional increase will cost borrowers with a $200,000 mortgage an additional $5,400 over a 30-year loan term.
Second, Congress has directed the FHA to increase its annual mortgage insurance premium or MIP by .10 percent.
The FHA, which is an insurance program, has two borrower charges.
- There is an up-front mortgage insurance premium which rose to 1.75 percent of the mortgage amount in April 2012.
- There’s also an annual mortgage insurance premium which in 2011 was increased to 1.15 percent for most borrowers. It will rise to 1.25 percent in April 2012.
- As of June 11, 2012 the annual mortgage insurance premium will increase by .25 percent to 1.50 percent for FHA loan amounts in excess of $625,500.
The annual MIP increase will be costly to borrowers. The expense of a $200,000 mortgage will grow by about $4,200 over the life of the loan.
Taken together, the two increases created in the payroll tax bill will raise the cost of a $200,000 mortgage by roughly $9,600 over the life of the loan.
The result of the congressionally-mandated increases is that FHA loans will be artificially less attractive.
So is the MIP increase necessary?
The purpose of the MIP is to collect money from FHA borrowers which is placed in a reserve called the Mutual Mortgage Insurance Fund. This fund is supposed to equal 2 percent of the FHA loans outstanding but is now below the required level.
However, HUD has reported to Congress that under the current MIP structure the reserve fund will grow to the required 2 percent by 2014.
Moreover, the policies and programs which created problems for the FHA loan system — policies and programs and put in place by the Bush Administration prior to 2009 — have been changed. For instance, the required down payment has been raised, the mortgage insurance premium schedule has been changed, “seller-funded downpayment assistance loans” have been eliminated and lender standards have been tightened. The results are plainly visible when looking at the FHA’s book of business
Lenders will pass through the new charges, raising home financing costs nationwide at a time when the housing market remains stalled. Higher mortgage costs mean borrowers will qualify for less financing so they will have less ability to pay higher prices. Home sellers will thus feel part of the fee increase in the form of less buyer demand and reduced pressure to raise prices.
The net result of the congressional action is that borrowers will needlessly pay more for FHA financing and home sales will suffer. Various politicians will no doubt explain how the legislation made the FHA reserve fund “more secure” when, in fact, it was becoming more secure without a further increase in borrower costs.