With all the political talk about reinvigorating and protecting the middle class, the government’s most venerable program for first-time homebuyers – that run by the Federal Housing Administration – may be on the verge of getting a little bit more expensive to use.
Since the mortgage meltdown five years ago, the loan of last resort for many buyers who have minor credit issues or who can summon only a small down payment has been FHA. When all other low-down-payment programs practically vanished overnight for that segment of the purchasing public, FHA, run by the Department of Housing and Urban Development, came to the rescue. FHA now insures about 1.2 million residential loans – about 15 percent of all U.S. home loans. For comparison’s sake, FHA insured just 5 percent of all U.S. home loans in 2006.
To keep itself solvent, FHA requires borrowers to pay a one-time, upfront mortgage insurance premium and then a monthly mortgage insurance premium. Five years ago, the formulas for figuring out these costs meant they were relatively inexpensive to the borrower. But periodically, FHA would either raise the upfront or monthly premiums to attempt to keep its reserves within its federally mandated guidelines.
Several weeks ago, HUD reported to Congress that the FHA Mutual Mortgage Insurance Fund is suffering from a $16.3 billion deficit. And for the fourth straight year, the MMI Fund has failed to meet its 2 percent statutory reserve amount, an amount required under law to be held back to cover excess losses.
HUD is permitted by law to get funds from the U.S. Treasury to meet its insurance claim obligations if there are not enough funds. However, FHA has never had to go to those Treasury funds for a bailout during its 78-year existence. But now the reserves are at negative 1.44 percent.
This is not a good thing.
And as the report noted, most of the bad loans that FHA made came before 2010. More than a quarter of the loans made in 2007 and 2008 were seriously delinquent as of last summer.
Now there is talk that FHA is looking to raise the premiums once again, making it more expensive for those homeowners who need to use the program.
Five years ago, with down payments of 5 percent or less (the FHA minimum at that time was 3 percent; now it’s 3.5 percent), the upfront premium was 1.5 percent of the base loan amount and the annual premium was based on 0.5 percent. So on a $200,000 loan, the upfront premium was $3,000 and the total loan amount was $203,000. The monthly insurance premium would be $83.33.
But during the last five years, FHA has tinkered with both formulas, moving the upfront premium higher and then lowering it, while raising the annual premium. Today, the upfront premium stands at 1.75 percent of the base loan amount, and for minimum-down-payment loans the annual premium (paid monthly as part of the overall mortgage payment) is 1.25 percent. Now the government is thinking of raising the one-time upfront premium to 2.05 percent and the annual premium to 1.35 percent.
So now that $200,000 loan would have an additional $4,100 placed on top of it for the upfront fee. And the monthly mortgage insurance premium would be $225 a month.
Private mortgage insurance companies were hammered and nearly driven out of business in the housing collapse. Higher FHA premiums only make them look better.
For a borrower who doesn’t have credit issues, putting down a little more to reach a minimum 5 percent down payment and going with PMI might be the wiser choice.
For that same $200,000 loan, the monthly mortgage insurance comes to roughly $111 a month – and there is no upfront mortgage insurance premium.
FHA is not dying, although it seems to be becoming a costly option for those who need to use it. But if that is the price that has to be paid, so be it – because if the housing industry is going to continue its comeback, there has to be an avenue for those borrowers who can only afford a minimum down payment or who may have some minor credit issues that would prevent them from using Fannie Mae or Freddie Mac conventional loans.
Robert Nusgart is a loan officer with Mortgage Master Inc. in Baltimore. He can be reached at 443-632-0858 or by email at firstname.lastname@example.org. Visit his website at RobertNusgart.com for the latest mortgage and financial news.