FHA Reform Could Open Door To Higher Insurance Fee
June 9th, 2010
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FHA reform is winding it’s way through the House of Representatives, reform which could bring some changes to the FHA program.
H.R. 5072, the FHA Reform Act of 2010, is designed to give the FHA more flexibility, more money and more enforcement authority.
To start, the legislation would allow the FHA to raise the annual mortgage insurance premium — the MIP — from .55 percent to as much as 1.5 percent. If passed, the new and higher rate would apply to new FHA loans, existing mortgage terms would not be changed.
The MIP
However, the proposed legislation does not say the FHA must raise the annual MIP, it says it may. In effect, the bill would give the FHA ammo if it needs to quickly raise the insurance premium.
Just for fun, let’s say that the House passes the bill and that it also goes through the Senate and is signed by the President. How likely is it that the annual premium would be raised?
To answer this question we really need to consider two issues:
First, in a woeful economy the FHA is doing fairly well. It’s reserves actually increased last year and it estimates that the program will generate a $6 billion profit in fiscal 2010.
Given this level of performance — and given the continued slow state of the housing market and the economy in general — it seems doubtful that the FHA would quickly move to raise the annual mortgage insurance premium, even if that was desired.
This, however, brings us to the second point: A raise in the annual MIP to 1.55 percent is not desired. In fact, the FHA has spoken about something much different.
Different Plan
“While HUD is moving to increase the upfront premium to 225 basis points,” says FHA Commission David H. Stevens, “we are ultimately planning to reduce that premium to 100 basis points, offset by a proposed increase in the annual premium to 85 basis points for loans with loan-to-value ratios (LTV) up to and including 95 percent and to 90 basis points for LTVs above 95 percent.”
In other words, a trade — less cost up front for higher fees over times. That would work for a lot of borrowers.
Enforcement
The legislation will allow the FHA more power to pursue lenders who create FHA mortgages which do not actually meet program standards. First, it will let the FHA go after lenders for any losses if they occur within a “reasonable period” after the loan is created. Second, if there’s fraud or misrepresentation, then there’s no time limit which would restrict the ability of the FHA to recover funds from lenders.
The bill is a long way from passage, but if it does get through the legislative system then one by-product will be very strict underwriting procedures. Lenders — not unreasonably — will want to do everything by the book, to assure that they limit their liability to the FHA.
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