FHA-backed mortgages are now a huge part of the financing landscape, but since April the up-front mortgage insurance premium has been 2.25 percent for most FHA borrowers. Now there’s some discussion regarding the idea of a 1 percent up-front MIP — but a higher annual MIP, a charge that would go from .55 percent now to .90 percent for most FHA borrowers.

A revised MIP schedule would lower the cash needed to close an FHA mortgage — but increase monthly cash costs.

It seems difficult to imagine that the up-front mortgage insurance premium (MIP) will soon be reduced given the rising claims and payouts faced by all mortgage insurance plans, including the FHA. That said, such a reduction is not outside the realm of possibility.

How do we know? It’s what the FHA is telling Congress. No less important, the math favoring such a change is entirely plausible.

Speaking before the Senate Appropriations Subcommittee on Transportation, Housing and Urban Development, and Related Agencies last week, FHA Commissioner David H. Stevens said that “while HUD is moving to increase the upfront premium to 225 basis points we are ultimately planning to reduce that premium to 100 basis points, offset by a proposed increase in the annual premium to 85 basis points for loans with loan-to-value ratios (LTV) up to and including 95 percent and to 90 basis points for LTVs above 95 percent.”

Back-Loading Fees

The FHA mortgage program has to have premium money for reserves so it can pay lender claims in case borrowers default. At the same time the FHA wants to get more people into homeownership. One of the best ways to make homes more affordable is to reduce up-front costs. In the case of the FHA mortgage program that’s done by requiring 3.5 percent down instead of the 5 percent to 20 percent required for most other mortgages– but the down payment is not the whole story. There are also costs for closing and that pesky up-front mortgage insurance premium which was raised from 1.5 percent to 2.25 percent as of April 5th.

HUD has moved to cut financing costs by $700 per transaction through the use of its new good faith estimate and HUD-1 forms. If it also can cut the FHA up-front MIP the settlement savings per transaction would be significant.

More Marketplace Volume

The move toward lower up-front costs could make it easier for first-time buyers to enter the marketplace. That’s important because the National Association of Realtors says first-timers represent 40 percent of all purchasers. You need first-time buyers so owners can sell current residences and purchase replacement properties. At the same time, the FHA reserves would actually grow over time. Here’s why.

The FHA has both an up-front mortgage insurance premium AND an annual mortgage insurance premium. The annual MIP is now .55 percent of the loan balance for most borrowers. If the annual mortgage insurance premium is raised from .55 percent to .90 percent then the FHA will see an increase in premium revenue that looks like this:

A home is sold for $300,000. the FHA loan amount is $289.500. In year one, if the annual MIP is .55 percent, the borrower is paying roughly $1,592.25 per year or $132.69 per month for FHA insurance. If the annual MIP is raised to .90 percent the monthly payment will be $217.13 ($2,605.50 divided by 12). The annual increase is $1,013.25 in year one. (All numbers are approximate because the loan balance is reduced each month as a result of amortization.)

The up-front MIP in our example was reduced from 2.25 percent to 1 percent. In this example the cash required at closing fell from $6,513.75 to $2,895 — a difference of $3,618.75. If the FHA will now collect an extra $1,013.25 in the first year of the loan and it will only take about 3.6 years to bring in as much cash as the old system.

Affordability

While the idea of a lower up-front insurance premium for FHA borrowers is attractive, not all loan applicants would benefit. Although a smaller up-front MIP would encourage homeownership, the new and higher annual MIP would make homes less affordable. Buyers would need more income to qualify for financing because monthly costs under the new plan would be higher. The tougher affordability standard would off-set some of the increased volume represented by lower up-front costs, a consideration not to be ignored.

Is The FHA Moving Toward 1% Up-Front Insurance Premiums? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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What’s going on here? A few things:

First, FHA reserves are falling. The insurance program needs more money. What happens when insurance programs need cash? They raise premiums. In the case of the FHA they want to move from 1.75 percent up front to 2.25 percent.

Second, the FHA says if your credit score is below 580 you should not be among the annointed and allowed to borrow with just 3.5 percent down. Instead, borrowers with woeful credit will need 10 percent. The question, of course, is why the FHA does not offer 10% for investors.

Third, the FHA is concerned that owners are offering seller contributions which are forcing up home prices artificially. In other words, without a seller contribution — a credit to the buyer at closing of as much as 6 percent of the sale price — the sale price would actually be lower because the owner would not be trying to re-coup dollars being credited to the buyer. The FHA will limit seller contributions to 3 percent of the sale price, a common lender norm.

fourth, with the subprime market sunk, loan officers who once offered tasty toxic loans to unknowing borrowers now want to sell FHA mortgages. The FHA, with very good reason, wants to track lenders with far greater care than in the past given the influx of subprime loan officers and companies. In essence, if they break the rules even a bit the FHA is threatening to dump them.

The Details

Below is what the FHA says specifically:

1. Mortgage insurance premium (MIP) will be increased to build up capital reserves and bring back private lending

The first step will be to raise the up-front MIP by 50 bps to 2.25% and request legislative authority to increase the maximum annual MIP that the FHA can charge.

If this authority is granted, then the second step will be to shift some of the premium increase from the up-front MIP to the annual MIP.
This shift will allow for the capital reserves to increase with less impact to the consumer, because the annual MIP is paid over the life of the loan instead of at the time of closing

The initial up-front increase is included in a Mortgagee Letter to be released tomorrow, January 21st, and will go into effect in the spring.

2. Update the combination of FICO scores and down payments for new borrowers.

New borrowers will now be required to have a minimum FICO score of 580 to qualify for FHA’s 3.5% down payment program. New borrowers with less than a 580 FICO score will be required to put down at least 10%.

This allows the FHA to better balance its risk and continue to provide access for those borrowers who have historically performed well.

This change will be posted in the Federal Register in February and, after a notice and comment period, would go into effect in the early summer.

3. Reduce allowable seller concessions from 6% to 3%

The current level exposes the FHA to excess risk by creating incentives to inflate appraised value. This change will bring FHA into conformity with industry standards on seller concessions.

This change will be posted in the Federal Register in February, and after a notice and comment period, would go into effect in the early summer.

4. Increase enforcement on FHA lenders

Publicly report lender performance rankings to complement currently available Neighborhood Watch data – Will be available on the HUD website on February 1.
This is an operational change to make information more user-friendly and hold lenders more accountable; it does not require new regulatory action as Neighborhood Watch data is currently publicly available.

Enhance monitoring of lender performance and compliance with FHA guidelines and standards.

Implement Credit Watch termination through lender underwriting ID in addition to originating ID.

This change is included in a Mortgagee Letter to be released tomorrow, January 21st, and is effective immediately.

Implement statutory authority through regulation of section 256 of the National Housing Act to enforce indemnification provisions for lenders using delegated insuring process

Specifications of this change will be posted in March, and after a notice and comment period, would go into effect in early summer.

HUD is pursuing legislative authority to increase enforcement on FHA lenders. Specific authority includes:

Amendment of section 256 of the National Housing Act to apply indemnification provisions to all Direct Endorsement lenders. This would require all approved mortgagees to assume liability for all of the loans that they originate and underwrite

Legislative authority permitting HUD maximum flexibility to establish separate “areas” for purposes of review and termination under the Credit Watch initiative. This would provide authority to withdraw originating and underwriting approval for a lender nationwide on the basis of the performance of its regional branches

FHA To Borrowers: Gimme More! is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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