If you are considering a Federal Housing Administration (FHA) mortgage, do so before new, costlier changes take effect.
The FHA plans to hike mortgage insurance premiums (MIP) – again.
The agency also plans to prevent new borrowers from canceling mortgage insurance premiums, even if borrowers meet the current loan-to-value requirement necessary to drop the payment.
The changes are expected to take effect by April 2013.
Issued Nov. 16, HUD’s “Annual Report To Congress Fiscal Year 2012 Financial Status FHA Mutual Mortgage Insurance”, reports a $70 billion loss on loans insured between 2007 and 2009.
The independent actuarial study for 2012 also estimates the FHA has exhausted the capital reserve ratio of FHA’s insurance fund. Congress set the ratio at 2 percent. Last year it fell to 0.2 percent. Now it’s below zero at -1.44 percent.
FHA mortgages, effectively replacing subprime loans, have been critical to the housing recovery.
In 2012, FHA insured some 1.2 million single-family mortgages, with 78 percent of the loans going to first-time homebuyers, up from 75 percent in 2012, according to the report.
Under scoring FHA loans’ importance for minority home buyers, in 2011, FHA loans accounted for 50 percent of all home purchase by African American borrowers and 49 percent of all purchases by Hispanic/Latino borrowers, compared to 27 percent of all home purchases nationwide.
FHA does not fund loans, rather it insures the loans against default. FHA’s reserves cover those insured losses.
“While the loans made during this Administration remain the strongest in the agency’s history, we take the findings of the independent actuary very seriously,” said FHA Acting Commissioner Carol Galante.
“We will continue to take aggressive steps to protect FHA’s financial health while ensuring that FHA continues to perform its historic role of providing access to homeownership for underserved communities and supporting the housing market during tough economic times,” Galante added.
To offset the losses, among other steps, the FHA plans next year to:
• Increase the FHA mortgage insurance premium by 10 basis points or 0.1 percent. If you sign for a $400,000 mortgage, the increase will add $400 per year to the cost of your mortgage.
• Change the cancellation period for the mortgage insurance premium.
The FHA’s 100 percent insurance guarantee remains in effect for the full 30-year life of a loan, but the FHA has been left without premiums to cover losses on loans held beyond the period within which borrowers have been allowed to cancel the coverage.
Right now, FHA allows borrowers to cancel mortgage insurance premiums once the loan balance reaches 78 percent of the home value.
On a 30-year fixed-rate mortgage (FRM), the minimum period of premium payments is five years, even if the loan balance drops to 78 percent of the homes value before that time.
On a 15-year FRM, there is no waiting period. Reach the 78 percent threshold in, say, two years and borrowers can cancel their mortgage payment.
In the future, borrowers could have to pay mortgage insurance premiums for the life of the loan or for some shorter period the FHA may allow.
• Also to offset losses, the FHA plans to sell more homes slated for foreclosure – at the rate of 10,000 per quarter – bolster loss mitigation efforts to help more homeowners avoid foreclosure and expand its short sale program.