Friday, August 6, 2010

FHA set to increase borrowing costs next month!

The Federal Housing Administration plans on September 7th to raise the cost of loans backed by the agency in an effort to strengthen its cash-strapped balance sheet.

Under the law, the FHA would have the authority to raise annual mortgage insurance premiums -- paid by the borrower over the life of the loan -- to a maximum of 1.5 percent. That is up from the current 0.55 percent maximum (which is currently being charged), although FHA Commissioner David Stevens has said the premium would rise gradually -- first to 0.85 percent (more than 5% down payment) or 0.9 percent (less than 5% down).

While raising the annual premium, the FHA has said it also plans to lower a separate upfront premium from the current 2.25 percent to about 1 percent to offset the cost of the annual premium. The upfront premium is paid at the time a loan is issued.

When I calculated costs per month under the new fee structure, new borrowers would pay $45 per month more on a sales price of $200,000. The upfront savings would be $13 per month (with the lower up front premium of 1%) and $58 higher on the monthly premium for a net of $45 more (I used .90 as the new monthly premium amount for a down payment of 3.50% which is the minimum down-the minimum down payment has not been changed).

The move follows Senate approval this week of a bill to allow the FHA to nearly triple the annual fees it charges borrowers, although the FHA plans more modest increases at first. The House of Representatives had already approved its version and President Barack Obama is expected to sign the bill this month.

The new fees are expected to raise about $3.6 billion annually for the FHA.
The FHA, which does not make loans directly, guarantees loans made to borrowers who meet certain restrictions.

As the mortgage crisis unfolded and private lenders began to pull back from lending, the FHA's total volume rose from $54 billion in 2006 to $376 billion in 2009, according to Inside Mortgage Finance, an industry publication.
The FHA's market share of total originations topped 20 percent in the three months through June, more than 10 times the share in 2006, when it was less than 2 percent.

The minimum down payments are still 3.5 percent for most borrowers. Lawmakers struck down a Republican proposal to raise them to 5 percent.

The FHA has capital reserves equal to just 0.53 percent of the value of the thousands of outstanding U.S. home mortgages it insures, well below the 2.0 percent required by law, according to an independent actuarial study released late last year. A new study is expected to be released this fall.

The House has also passed a broader bill to strengthen the FHA's enforcement capabilities. The Senate is expected to consider its version of the broader bill after senators return from their summer recess in September.

I have taken information taken from an article written by By Corbett B. Daly
WASHINGTON, Aug 6, 2010 (Reuters)

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