08 Dec 09 FHA Mortgage Insurance Premiums Rising
FHA unexpectedly delayed the release of a much-anticipated audit of its capital reserves in November. Of course, the mortgage lending industry feared the worst that the government’s FHA mortgage insurance fund was negative. After the audit was released showing a thin $3.6 billion cash cushion with promises from FHA to keep the fund solvent, a new worry emerged revealing the government could move to raise the FHA mortgage insurance premium it charges borrowers, increasing closing costs for millions of potential customers. At a press conference unveiling the audit, housing secretary Shaun Donovan confirmed that FHA is weighing its options, including a possible hike in the upfront MIP. Mr. Donovan would not rule it out entirely but also said that it was not imminent.
Currently, FHA mortgage lenders charge a borrower roughly 165 basis points at the closing table plus 50 basis points monthly. The points are often financed and the borrower cannot recoup the premium. The 50 bps are part of the monthly payment and can be adjusted up or down, depending on the FHA’s needs and concerns. Today, FHA mortgage loans account for between 25% and 30% of all new originations and have become the program of last resort for homebuyers with both poor credit and low or no down-payments. “If they (FHA) need to raise cash I would rather see them raise the monthly rather than the upfront MIP,” said one mortgage executive following the issue. But Jim Pair, president of the National Association of Mortgage Brokers, wasn’t thrilled with the idea of raising the MIP unless FHA really needs to. “An increase at this time would be detrimental to the housing market,” Mr. Pair told Origination News. The audit found that the Mutual Mortgage Insurance fund actually has $30.7 billion in cash on a total book-of-business approaching $700 billion but $27.1 billion of that amount has been set aside to cover anticipated losses on FHA mortgages, leaving it with a cash cushion of just $3.6 billion.
The new study believes the MMI will stay in the black unless the housing recession deepens significantly. If that happens, the fund would have a negative capital ratio of 0.46%. But if the mortgage market suffers what FHA calls a “downward interest rate shock” the fund could go negative by as much as 2.33%. The actuarial study (audit) of FHA was done by IFE Group of Rockville, Md. Mr. Donovan said the release of its findings were delayed because HUD wanted the firm to conduct “more extreme” stress modeling on the reserve fund. “We felt some of the loss scenarios were not as bad as we expected,” said the HUD secretary.
Commenting on IFE’s findings, Howard Glaser, a former HUD attorney who is now a lobbyist, said FHA is not immune from the laws of economics. “Facing the equivalent of a 500-year flood in the housing market, and having stepped into the void left by reckless lenders who pillaged the mortgage system, FHA now finds itself tight on capital.” To many mortgage bankers, the FHA loan program is the only game in town, and without it originations to cash strapped and low-income borrowers would seize up.
