FHA to Increase Cost of Up-Front Mortgage Premiums for New 30-Year Loans

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Bloomberg.com, By Lorraine Woellert, February 2012

The Federal Housing Administration will increase the cost of up-front mortgage insurance premiums by 75 basis points as part of eff orts to rebuild the agency’s insurance fund.

The increase will apply only to new 30-year, single-family FHA loans and won’t aff ect the cost of streamlined refi nancings, FHA Acting Commissioner Carol Galante said yesterday in a call with reporters. The refi nancing program allows FHA borrowers in good standing to qualify for a new, lower-rate FHA loan with minimal paperwork.

The higher premium will add about $5 per month to the cost of a typical $150,000 FHA loan and increase the agency’s revenue by about $1 billion a year, Galante said. The increase will take eff ect April 1.

The increase in the up-front premium will be in addition to other premium increases announced earlier this month as part of the agency’s 2013 budget, Galante said.

“We have determined that it is appropriate to increase mortgage insurance premiums in order to help protect our capital reserves and to continue encouraging the return of private capital to the housing market,” Galante said in a press release announcing the changes.

Analysts have anticipated an increase in FHA premiums since at least November, when an audit reported that agency reserves had fallen to a record low of $2.6 billion. The FHA’s capital ratio, which measures its ability to withstand losses, was 0.24% in the year ended Sept. 30, the third straight year it has failed to meet the legal minimum of 2%.

Fund DwindlesRepublican lawmakers have voiced concern about the dwindling insurance fund and whether the agency would have to draw on the U.S. Treasury Department to remain solvent. An Obama administration budget plan sent to Congress on Feb. 13 projected that the FHA could require as much as $688 million.

“My main question is, is the FHA broke? Because that is the concern,” Representative Shelley Moore Capito, a House Financial Services subcommittee chairwoman from West Virginia, asked Galante today during a hearing on the agency’s budget.

The higher premium will add about $5 per month to the cost of a typical $150,000 FHA loan and will take eff ect April 1, 2012.

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Galante said the premium increases, as well as a legal settlement on foreclosure practices that includes a $1 billion payment from Bank of America Corp., “will more than fill that gap.”

Galante, in remarks to reporters yesterday, also didn’t rule out future rate increases.

Being ‘Vigilant’“If the economy changes, if something else happens, we have to be vigilant here,” she said. “I don’t want to be overly optimistic.”

Earlier this month, President Barack Obama said he would ask Congress to approve funding for a plan that would make it easier for borrowers to refinance into lower interest rates even if their property value has fallen to less than the size of their mortgage. The proposal would allow those homeowners to finance into FHA-guaranteed loans and would be paid for by a tax on financial companies.

The agency could announce a change to streamlined refinancings as soon as this week, said Brian Sullivan, an FHA spokesman.

Because the FHA backs many first-time and lower-income borrowers, the premium increases could have a negative effect on the housing market, particularly on homebuilders, according to Jaret Seiberg, senior policy analyst at Guggenheim Securities’ Washington Research Group.

‘Negative’ for Housing“We believe this is a negative for housing as it will make it that much more expensive for first-time homebuyers to enter the market,” Seiberg said in a note to clients.

Starting April 1, the up-front premium will cost 1.75% of the loan amount. Increases in up-front premiums are generally easier for borrowers to bear because they can be amortized over the life of the mortgage.

Annual premiums on those larger loans up to $729,750 will rise by 35 basis points, a move announced as part of the FHA budget. Annual premiums on loans up to $625,500 will increase by 10 basis points.

The FHA charges lenders and borrowers a fee in exchange for a guarantee that the mortgages it backs will be paid.

The agency has grown rapidly since the 2008 subprime lending collapse drove private lenders out of the market. The FHA now insures more than a third of home purchases. Since 2008 the FHA has paid $37 billion in claims related to defaulted mortgages.

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