Why FHA Premiums Should Not Be Raised

Will the FHA loan program raise its insurance premium for new borrowers?

At first it might seem as though higher premiums are in order given that the FHA reserve fund — the Mutual Mortgage Insurance Fund or MMI — is well below the 2 percent required reserve. While that may be true, one must also look at trends and directions.

HUD Secretary Shaun Donovan says his department is now looking at five potential changes in the FHA program — including higher mortgage loan premiums.

According to Donovan, the “FHA is constantly evaluating the appropriate level of premiums given the potential risks to the MMI Fund, and any action regarding premiums will be considered in the context of balancing access to credit in today’s economic environment with the need for added revenue generation to protect the Fund.”

The reserve fund gets its money from the up-front and annual mortgage insurance premiums (MIP) paid by FHA borrowers. The fund is reduced each time there’s a foreclosure claim — and given today’s market there have been a lot of lost homes.

Donovan points out that “FHA’s current premium levels are the highest they have ever been in the agency’s history” so can they really go higher?

That said, you have to wonder if there is any need for higher premiums to increase the MMI fund.

HUD says that without a premium increase the reserve fund will reach 2 percent (1.99 percent) by fiscal year 2014 — we are now in fiscal year 2012.

One of the central results of higher FHA premiums is that they will drive away prospective borrowers. Higher premiums will make the FHA program less attractive and less competitive.

The Mortgage Insurance Companies of America (MICA) — the trade association that represents the private mortgage insurance industry in Washington — says the “FHA should increase its premiums, raise its minimum borrower down payment to 5 percent, and change the way FHA area loan limits are calculated.”

One by-product of such proposals is that the FHA program will become more expensive and thus less attractive to borrowers.

The truth is that the FHA program has changed substantially during the past three years.

For instance, the Mortgage Bankers Association points out that “in 2008, Congress passed the Housing and Economic Recovery Act. That legislation terminated the failed seller-funded downpayment assistance programs that were responsible for a disproportionate level of FHA’s defaults.”

In addition, the down payment requirement has been increased to 3.5 percent and insurance premiums have grown.

Because the FHA program has changed under the Obama Administration the huge risks and losses run up from 2000 through 2008 have been replaced with a more stable and financially-positive system. There’s no need to raise premiums, no need to make the FHA program less attractive and no need to help special interests.

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