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FHA Reform — The Real Story

by Peter G. Miller
June 14th, 2010

Now that it has passed the House, the Internet is filled with reports which explain in some detail that the FHA Reform Act of 2010 will raise monthly FHA mortgage premiums by $42, tripling the annual mortgage insurance premium (MIP).

It could happen. It could also happen that visitors from the Planet Gurgone V will land in Times Square. More realistically, nothing of the sort will occur.

The legislation does not require HUD to change FHA loan requirements. Instead, it simply gives HUD the authority to raise the annual MIP.

Congressional Approval

To understand what’s going on here, recall that the up-front mortgage insurance premium was increased from 1.75 percent to 2.25 percent. To do this required an Act of Congress. Congressional action was needed because HUD did not have the authority to raise the up-front MIP.

Now the FHA would like to have the power to increase the annual MIP without having to wait for Congress to act — or maybe for Congress to oppose an increase and not act. Thus, the FHA Reform Act of 2010 gives the FHA an ability to raise the annual insurance premium if that is necessary.

Perspective

However, and I’m sorry to introduce reality into the conversation, the scary reports of a higher FHA annual premium need to be placed in perspective.

First, the higher premium would apply to new financing, not financing now in place.

Second, there is now no reason to raise the FHA premium. Why? Remember the FHA has said it will generate a $6 billion profit in fiscal 2011.

Third, there is some talk of raising the annual MIP — and LOWERING the up-front MIP at the same time.

During congressional testimony in May, Commissioner Stevens offered this comment: “While HUD is moving to increase the upfront premium to 225 basis points 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.”

Fourth, there’s a lot of opposition to the mere existence of the FHA program and thus there are stealth efforts to undermine it to the point where it’s useless. For instance, an amendment to the FHA Reform Act that would have raised the required down payment from 3.5 percent to 5 percent was defeated. An amendment to limit FHA market share to 10 percent — a huge gift for Wall Street banks — was also defeated. An amendment to reduce the maximum FHA loan limit lost.

The FHA forward loan program is not perfect, but no sensible person is going to radically change a mortgage insurance plan which is working in tough times and has not cost taxpayers a dime. Maybe in the future the annual mortgage insurance premium will rise, but for the moment such thinking is inconsistent with the marketplace. And reality.

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