The FHA’s Evolving World

by Peter G. Miller
May 3rd, 2010

News on the FHA mortgage front is both good and bad. On one hand an effort to raise the FHA down payment from today’s 3.5 percent to 5.0 percent did not pass muster with the House Financial Services Committee and is thus essentially dead.

What did make the cut in HR 5072 is that if passed the bill will allow the FHA to raise annual premiums “in an amount not exceeding 1.55 percent.”

The reality is that what we have here is a little back-up. The FHA is not going to institute a new and higher annual rate anytime soon. If it does, the new rate will only apply to newly-written FHA loans, meaning that if you have an interest in financing or refinancing with an FHA mortgage it might be a good idea to get such financing now rather than later.

As to the proposal to raise the FHA down payment to 5 percent you look at this and wonder, how will that help either the FHA or the country?

The reality is that the FHA raised the minimum down payment from 3 percent to 3.5 percent, an increase — but a modest increase. With a $200,000 loan that’s an extra $1,000 up front — money justified by the claims faced by the FHA reserve fund during the past few years.

What’s not justified at this point is FHA loan requirements that would mandate a 5 percent down payment, an increase hat would make the FHA program largely indistinguishable from private-sector loans, something critics of the program have long wanted. Why? The FHA sets a “bad” example for private sector lenders who love prepayment fees and toxic terms. Raising the FHA down payment simply makes the program less competitive, especially for borrowers who do not understand that the FHA offers far more than low up-front costs.

Reverse Mortgages

Next we come to the FHA reverse mortgage. Combine falling real estate values with typically short-terms, say about six years on average, and the so-called home equity conversion mortgage (HECM) — HUD’s term for a reverse mortgage — is a problem.

There are and must be a lot of claims because of the way the HECM program is structured and the fall in home values. However — and oddly — there’s relatively good news here. Not great news, and not news which says there’s not a problem, but news which at least says things have become less dire.

HUD is now asking Congress for $250 million to sustain the reverse mortgage program. How could this possibly be good? Well, last year they were asking for $800 million….

While the FHA reserve fund for the 203(b) single-family program actually grew last year, the reverse mortgage program in contrast remains in trouble. If you want a reverse mortgage it might make sense to get one now.

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