FHA To Begin Risk-Based Pricing In July

by Peter G. Miller
May 9th, 2008

HUD has announced that it will begin using a “fair and flexible” mortgage insurance premium system for FHASecure loans starting July 14th.

“With a flexible premium structure, FHA can fulfill its mission of assisting families who do not have access to prime-rate financing. Fair pricing will allow FHA to reach more troubled homeowners without placing excessive risk on its insurance fund,” said HUD Deputy Secretary Roy A. Bernardi.

Actually, according to the General Accountability Office just the opposite is true: As we reported last July:

A new study by the Government Accountability Office shows that if the new insurance plan is adopted it will produce both winners and losers:

“GAO’s analysis of data on 2005 FHA home purchase borrowers shows that 43 percent would have paid the same or less under the risk-based pricing proposal than they actually paid, 37 percent would have paid more, and 20 percent (those with the highest expected claim rates) would not have qualified for FHA insurance.”

In other words, the majority of borrowers will do worse if the new “reform” plan is enacted.

The HUD release is below:

WASHINGTON — The Bush Administration today issued final guidance that will permit its flagship mortgage insurance program to assist more homeowners who are struggling to keep up with their high-cost subprime adjustable rate mortgages. To ensure taxpayers do not assume the cost of this expansion, HUD’s Federal Housing Administration (FHA) will implement a fair and flexible premium pricing structure beginning July 14, 2008.

Modifications to FHASecure will help homeowners who can no longer afford their mortgages and missed up to three monthly mortgage payments over the past 12 months. As an alternative to foreclosure, eligible borrowers can refinance with FHA and lenders can voluntarily write down the outstanding subprime mortgage principal balances. Implementation of FHA’s new premium pricing plan on July 14 will coincide with the start date to expand FHASecure.

“With a flexible premium structure, FHA can fulfill its mission of assisting families who do not have access to prime-rate financing. Fair pricing will allow FHA to reach more troubled homeowners without placing excessive risk on its insurance fund,” said HUD Deputy Secretary Roy A. Bernardi.

Currently, FHA has a ‘one size fits all’ premium structure that charges borrowers 1.50 percent of the loan balance upfront and .50 percent annually regardless of their credit standing. FHA feels this approach does not treat borrowers equitably and may put the FHA insurance fund at risk. Under the new rule, FHA’s upfront mortgage insurance premium will range from 1.25 percent to 2.25 percent. Borrowers must continue to adhere to FHA’s strict underwriting criteria. By charging different premiums, FHA will operate like most other insurance companies. This premium structure will preserve lower premium costs for FHA’s traditional borrowers, including low-income and minority families who have a strong credit history and save for a downpayment.

By charging slightly higher premiums based on risk, FHA will be able to extend the benefits of its FHASecure program to more homeowners affected by the volatility in the mortgage market. Borrowers refinancing into FHA from the subprime market are better off, even with slightly higher mortgage insurance premiums, because FHA insurance gives them access to substantially lower interest rates, and lowers their overall mortgage costs. The difference between the existing 1.50 percent upfront premium and a 2.25 percent premium for a $150,000 mortgage is only about $7 per month. With families turning to FHA in record numbers, the agency is on pace through its expansions to help approximately 500,000 families refinance into its affordable mortgage product by the end of this year.

“Charging borrowers a fair premium based on their credit risk means that they pay their own way, allows FHA to reach more borrowers, and helps create a more financially sound FHA. That’s good news since FHA, like any other insurance company, supports its flagship program through its premiums – not taxpayer dollars,” said Assistant Secretary for Housing – Federal Housing Commissioner Brian D. Montgomery.

FHA has the statutory authority to charge as much as 2.25 percent for the upfront premium and .55 percent for the annual premium. This premium structure will give borrowers an incentive to improve their credit and thereby pay lower premiums. Today’s announcement will allow FHA to offer a range of premiums, depending on the level of risk borrowers represent based on their credit profile and the amount of their downpayment. In other words, to determine a fair premium, FHA will look at the borrower’s financial responsibility and how much they are willing to invest in their home.

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3 Responses to “FHA To Begin Risk-Based Pricing In July”

  1. Patsy Kropuenske Says:

    is the up front MIP and monthly fees change for all FHA loans or o the FHASecure only?

  2. chere Says:

    I am told that I do not qualify for the FHA secure because my house does not appraise out at the value on my loan -and I am not 3 payments behind. I am trying to be proactive -so as not to fall behind. Is there any recourse for me? Once my morgage sets in Novmeber I will not be able to afford my mortgage any help would be greatly appreciated. I am a single parent trying to keep up.

  3. ed kowalczyk Says:

    Perhaps you should take a close look at the mortgage you have currently there is a good chance that your mortgage payment might not adjust at all. Thanks to the drastic reductions in key lending rates, arms that have expired are going nowhere but down, and or staying the same. Some of those arms out there were designed not to go anywhere but up or stay the same. Others are designed to match market conditions and flucutate up or down. You might not have the time bomb alot of uneducated folks may or may not have led you to believe.Value is a big big issue but there are some recent movements that may allow you soon to get some assistance…I am interested to see if all the reform continues to be smoke and mirror politics or real solutions for real families.

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