Will HUD Drop Its New Premium Plan?
July 25th, 2008
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If FHA reform goes through as the legislation is currently written, then thousands of borrowers will soon find that they have a new FHA mortgage insurance premium (MIP).
HUD has been trying to bulk up collections from borrowers by changing the way it charges for FHA insurance. Instead of the flat-rate, one-size-fits-all system that has been in place since the 1930s, HUD instead wants to move to risk based pricing, a standard that went into effect July 14th.
The maximum rates under the flat-rate plan were 1.5 percent up front plus .50 percent of the unpaid balance, paid out monthly. The maximums under the new plan are 2.25 percent plus .55 on the unpaid balance.
HUD points out, correctly, the many borrowers will not pay the maximum under the new plan and that, indeed, some borrowers could even have lower insurance costs. What HUD does not say is that borrowers who want to refinance toxic loans with FHA mortgages are the ones most likely to have the highest insurance premiums because they have lousy credit.
H.R. 3221, The Foreclosure Prevention Act of 2008, as passed by the House, provides for a one-year moratorium on the imposition of risk-based insurance premiums for the FHA program. The problem for HUD is that thousands of loans have been processed since July 14th, the date it established the new insurance rate plan.
To conform with the legislation it would make the most sense to switch back recent borrowers into the traditional flat-rate fee plan. For many this will mean big savings, for others it will mean higher costs. Look for such an announcement once the bill becomes law.
It would be useful to know the exact number of people who will face higher rates, and the exact number who will enjoy lower costs, with flat-rate premiums to see the practical impact of risk-based premiums.
The actual language, as approved by the House, is below:
SEC. 2133. MORATORIUM ON IMPLEMENTATION OF RISK-BASED PREMIUMS.
(a) In General — During the 12-month period beginning on the date of enactment of this Act, the Secretary of Housing and Urban Development shall not enact, execute, or take any action to make effective the planned implementation of risk-based premiums, which are designed for mortgage lenders to offer borrowers an FHA-insured product that provides a range of mortgage insurance premium pricing, based on the risk that the insurance contract represents, as such planned implementation was set forth in the Notice published in the Federal Register on May 13, 2008 (Vol. 73, No. 93, Pages 27703 through 27711)(effective July 14, 2008).
(b) Insurance of Mortgages Under the National Housing Act- During the 12-month period beginning on the date of enactment of this Act, the Secretary of Housing and Urban Development shall not enact, execute, or take any action to make effective the implementation of any other new risk-based premium product related to the insurance of any mortgage on a single family residence under title II of the National Housing Act, where the premium price for such new product is based in whole or in part on a borrower’s Decision Credit Score, as that term is defined in the Notice described under subsection (a), or any successor thereto.
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July 25th, 2008 at 6:50 am
Risk-based premiums are based upon risk of default. The higher the risk, the higher the premium. If the risk of default can be lowered, this will be reflected in lower premiums. The question then is…how can we lower the risk? The answer is financial education. The borrower should be given an option to agree to taking a course in specific financial literacy that will provide guidance for better financial judgement. If this can be accomplished, we will have a win-win situation. Premiums will be lower and borrowers will benefit by the potential of improving their credit scores.
July 27th, 2008 at 2:03 am
Not a word about veterans home loans and insurance. 5 years ago I moved into my VA loan home. August of 2008 will increase my expense by 50%.
My fixed income is direct into my bank and my payments are arranged the same way to Wells Fargo.
I have not missed a payment nor have I been late. IThe same is true of my insurance.
Are their no exceptions for veterans like me for this abuse.