FHA Legislation Passes House: What it Means for Consumers

by Karen Lawson
June 10th, 2010
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The Wall Street Journal reports that the US House has passed a bill which allows FHA to raise the annual portion of mortgage insurance premiums from the current level of.55% to 1.50%. This increase is expected to increase monthly premiums paid by borrowers by an average of $42.00 a month, while generating an estimated $300 million per month for FHA.

Opponents of FHA’s expanding role in the US housing market proposed an amendment requiring FHA to scale back its role from current levels of approximately 33% of new home loans to 10% by 2012. This measure, and others designed to limit FHA risk and reduce its role in backing home loans, did not pass. Critics contend that FHA assumed to large of a role when private lenders fled the sub-prime market when it collapsed in 2007. Worries about potential need for a taxpayer bailout fueled the failed amendments.

FHA Home Loans: Understanding FHA Mortgage Insurance

Understanding what FHA mortgage insurance does and how it works is important for anyone considering a home loan or mortgage refinance with an FHA loan.

  • FHA does not make mortgage loans: FHA guarantees mortgage loans made by FHA approved lenders. When an FHA loan fails, mortgage lenders file claims for reimbursement for their losses. In many cases, the US Department of Hosing and Urban Development, the parent agency of FHA, also takes title to homes foreclosed by FHA lenders.
  • FHA mortgage insurance premiums: The increased risks associated with low down payments and more lenient FHA guidelines are offset by mortgage insurance premiums paid by borrowers of FHA loans. Mortgage insurance premiums are paid in two stages. The up front mortgage premium (UFMIP) is paid at closing and is calculated as 2.25% of the original mortgage amount. The annual portion of the mortgage insurance premium (MMI) is prorated monthly and added to the monthly P&I payment, along with prorated costs of hazard insurance and property taxes. Borrowers have the option of rolling the UFMIP into the mortgage loan.

FHA Mortgage Insurance: Equalizing UFMIP and Annual Premium Amounts

FHA plans to reduce the UFMIP from its current rate of 2.25% of the original mortgage amount to about 1%, while increasing the annual mortgage insurance premium from .55% to .90%. This will reduce the UFMIP due at closing. Borrowers wouldn’t be required to pay as much, or roll as much into their mortgage loan amounts.

While increasing costs assessed to low and moderate income borrowers seems counter productive, FHA needs to reinstate its falling reserves in as responsible and painless a manner possible. This legislation provides FHA the ability to increase its cash reserves while minimizing impact on consumers depending on FHA loans for buying and refinancing homes.

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