Wednesday, March 9, 2011


FHA and Rural Housing Changes

In a business that is changing from hour to hour, knowledge is priceless

Given the legislative mandate found in the National Housing Act (2009), FHA has to remain financially sound. To ensure this end, FHA has announced an increase in their annual mortgage insurance premium.

For all case numbers issued on or after April 18, 2011, FHA will increase the premium by .25 basis points. There will be no change to the upfront premium. The chart below illustrates the upcoming changes.

Mortgage Insurance Premiums
Loans > 15 years
UFMIP = 100bps Annual Premium Annual Premium
LTV Through 4/17/2011 On/After 4/18/2011
Less or equal to95% 85bps 110 bps
Greater than 95% 90 bps 115bps
LTV Loans less than or equal to 15 years
UFMIP = 100 bps Annual Premium Annual Premium
Less or equal to 90% None 25bps
Greater than 90% 25bps 50bps

Example of Annual Mortgage Insurance Premium Increase 30 year Term
Average Loan
LTV greater than 95%
October 2010 April 18, 2011
90 bps 115
Sales Price $200,000 $200,000
Minimum Down payment (3.5%) 7,000 7,000
Mortgage Amount without UFMIP $193,000 $193,000
FHA Annual MIP (Monthly Payment)* $144.75 $184.95
Change in payment (Monthly increase $40
*pre Oct. 2009, the monthly premium = 55bps or $91.66 in our example. So in the last 18 months the premium has increased $93.28. Does FHA consider that significant? This new change represents an increase in 18 months of almost 110%.

Quoting FHA, “It is anticipated that this increase will have minimal impact on borrowers”….but will significantly strengthen the capital position of the mortgage insurance fund. WHAT! How can FHA possible make such a statement. Are they really this out of touch with the home buyer?…Are our regulators this disconnected with reality? Defies logic. Let’s think about this. . The Housing Crisis continues to be the major drain on our economy. Homes get foreclosed on. FHA panics as they see their Mortgage Insurance Fund continue to decrease. They panic. Hurry, increase the mortgage insurance for new home buyers to compensate. Home buyers face higher monthly payments. Less home buyers can qualify due to the higher payment. Less demand as buyers disappear, supply of homes increase. Home prices continue to drop. Sellers are stuck. More homes get foreclosed on….Get the picture. The cycle continues downward with no end in sight….just like flushing the toilet.

Following FHA’s lead, Rural Housing has announced a major shift in policy. It will now start collecting an annual mortgage insurance premium. Like FHA the intent is to make rural housing loans subsidy neutral, thus eliminating the need for taxpayer support of the program. For the upcoming year, (starting Oct. 1, 2011) Rural Housing loans will now require an annual fee of .30bps. of the outstanding principal balance. The upfront fee decreases from the current 3.5% down to 2.00%.

The smoke and mirror ploy of decreasing one premium and increasing or installing a new one still results in the homebuyer paying significantly more for same home purchase. Substituting rural housing numbers into the above FHA example, the home borrower’s payment increases by over $33 per month. May not sound like a lot but are wages increasing to keep up? Unlike our government, households have to live with a balanced budget. None of us can deficit spent for very long. Simple math. Increase in mortgage payments typically results in a decrease in other consumer purchases. Less purchases, less manufacturing…less need for jobs…less need for homes….you get the picture.

Another costly consequence of these changes make refinancing a mortgage loan next to impossible. Gains made by lowering the interest rate to free up more monthly cash flow are now offset by the increase in mortgage insurance. So once again, instead of helping, our regulators are creating an environment that is unfriendly to housing. If rates start to climb as forecasted, the results of higher rates and higher insurance premiums could highly impact the housing market.

1 comment:

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