FHA hikes its fees
Only new borrowers will be hit by rising mortgage insurance premiums next month. But there's also a consolation.
This post comes from Marilyn Lewis of MSN Money.
The cost of getting an FHA mortgage is growing -- by about $38 a month, on average. The price hike in FHA mortgage insurance premiums, which takes effect Sept. 7, will hit only new borrowers. Current holders of FHA loans won't be touched.
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The fee hike was approved unanimously by the U.S. Senate this week. The House already had signed on. President Obama is expected to sign the change before the end of the month.
FHA takes away -- and gives a little
Congress lifted the cap on how much FHA can potentially charge, to 1.5% of a borrower's loan amount from the current cap of 0.55%. But the FHA doesn't plan to use all of the new headroom allowed by Congress. At least not right away.
After Obama OKs the measure, premiums will rise to 0.85% for new borrowers who bring 5% equity to their deals. With a down payment of less than 5%, premiums will cost 0.9%.
And, for consumers, there's something of a consolation: The rate hikes will be less ghastly because, simultaneously, the agency is lowering its upfront mortgage insurance premium. (Homebuyers pay for FHA insurance in two ways: through a one-time upfront premium and through monthly insurance payments.) FHA hiked the upfront fee earlier this year, from 1.75% to 2.25%.
FHA Commissioner Dave Stevens has told Congress he plans to reduce the upfront charge. Some reports -- Reuters, for one -- say the new upfront premium will be 1% after Sept. 7. InmanNews says it'll be 1.25%.
Inman runs the numbers (a subscription may be required):
Under the current premium structure, borrowers taking out a $200,000 loan with a minimum 3.5% down payment pay an upfront premium of about $4,500, plus $1,100 a year in annual premiums.
After Sept. 7, the upfront premiums of 1.25% on a $200,000 loan would equate to a smaller upfront payment of about $2,500, with a $700 increase in annual premiums to $1,800 a year, or an extra $58 a month.
You can pay the upfront fee at closing or roll it into the loan, says The Washington Post.
A scramble to grow reserves
Question: Why the big rate hike in the middle of this long, stubborn recession?
Answer: The FHA itself has been hit financially by the recession.
The FHA doesn't make loans; it insures low-down-payment mortgages for borrowers who meet its standards. The agency has seen its capital reserves plunge to razor-thin levels after taking on an outsized role amid the housing bust.
The agency's capital reserves fell to 0.53% earlier this year -- below the congressionally mandated 2% threshold. The fee increases are expected to raise about $3.6 billion.
They'll also bring prices in the government-sponsored program closer to prices for private mortgage insurance.
Private insurers have lost market share to FHA since the recession began 18 months ago. Writes MortgageLoan.com, in a post titled "FHA stealing market share from private mortgage insurers":
FHA loans are enjoying a big resurgence in popularity -- even rapidly gaining an unexpectedly large share of the mortgage market. A year ago, the FHA controlled 4% of the PMI market with less than 300,000 loan guarantees; but now, FHA loan guarantees account for more than 800,000 transactions per year, or about 15% of this market.
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