FHA Mortgage Insurance Changes: Is The New Rule Still On Track?

Mortgage and Lending with FHA Loan Advice

It seems the upcoming changes in FHA mortgage insurance rates haven't drawn much attention. Looks like that may be changing according to this news item that I saw on Bloomberg.com this morning.

You can find the full article here: Three U.S. Senators Trying to Block New Federal Housing Rule

According to Bloomberg:

Three U.S. senators are trying to block a new Bush administration rule that congressional auditors said would unfairly hamper African-Americans trying to finance their first home purchase.

I had not thought about the rule in those terms at all, but according to the article:

The rule would impose a disproportionate burden on African- African home buyers, Congress's Government Accountability Office said in a July report. About 32 percent of current African- American borrowers would be disqualified from the program, and another 40 percent would pay higher premiums, the report said. About 79 percent of FHA-insured loans went to first-time homebuyers in 2006.

From the beginning of the comment period back in October, I have had some reservations about the changes to the FHA mortgage insurance prices scheduled to take effect on January 1, 2008. But I know that some changes are necessary in order to maintain the viability of the program. Riskier borrowers need to pay higher mortgage insurance rates than borrowers who haven't been able to manage their finances. This doesn't mean that they can't still get loans. Just that like any insurance program, riskier coverage requires higher premiums. This change should be purely related to credit ratings and nothing else.

The most significant problem with the new rule is that it excludes borrowers with no credit score from the 3% down option while it still allows borrowers with a credit score of 500 to put 3% down. I think both should be eligible for the 3% down. Having no credit score means that a person has no bad credit either. A 500 credit score could actually indicate quite a few credit problems. Why should a young couple straight out of college, that didn't fall into the trap of accepting all those ridiculous credit cards they get offered, be penalized for being prudent. Yet someone who took those credit cards, maybe even failed to pay them, and has collection accounts gets a better deal!

The new rule also fails to account for the implementation of the FHASecure program. Those borrowers who by the rules of the program are good borrowers whose only problem was a catastrophic interest rate increase do not need to be penalized by higher mortgage insurance rates as well.

In addition, the new rule doesn't differentiate multi-family properties from single family properties. Common sense would dictate that single family mortgage insurance rates should be lower than multi-family rates.

The new rule also does not address the potential changes in the loan to values allowed under the pending FHA Modernization Act. If maximum allowed loan to value ratios are raised, a new rule with a new comment period and a brand new delay in implementing the new law might be required. There is also no mention in the new rule of other FHA programs such as FHA ARMs or the condominium program. It also fails to indicate that the premium can still be financed by the borrower, although these last two problems are probably just overlooked and not intentional.

Senators Elizabeth Dole, Chris Dodd and Richard Shelby are backing an amendment to the FHA Modernization bill that would delay the implementation of the new mortgage insurance guidelines for another year. It turns out that Senator Dole has actually been using Senate procedures to put a hold on the highly needed FHA reform bill until her amendment mandating this delay was attached to the bill!

I don't know anything about the background or the methodology of the Government Accountability Office's study. However, my feeling is that FHA borrowers should be looked on as individuals and any decisions or rules should be based on individual credit profiles. The FHA program will not remain self sufficient if it does not begin charging higher premiums for riskier borrowers at some point. I certainly don't have any problem with a delay in implementing these mortgage insurance changes while legislators make sure that this impact is truly based on individual credit profiles. Surely there was a better way to accomplish this goal than holding up potential subprime mortgage relief from many thousands of people.


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Philip Turner
Mortgage Banker Since 1980
It is always eye-opening to read what goes on with proposed changes to a mortgage program.  One step forward my end up taking us two steps back.  It is hard to keep up with all of this.  Thank you for sharing your thoughts.
Nov 25, 2007 12:00 PM #1
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