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FHA Raising Fees to Cover $65B Shortfall...Should We Be Surprised?

By
Real Estate Agent with Ansley Real Estate/Christie's International 262285

FHA is estimated to be 46-65 billion dollars undercapitalized so increases in FHA mortgage insurance premiums and new, tougher underwriting standards will begin April 1st. Beginning then, it will cost new borrowers significantly more than refinancing borrowers who have had an FHA loan four years or longer. Tougher standards now, after digging a 46-65 billion dollar hole? Currently, 40% of FHA loans are considered subprime; is that going to change? Maybe Washington should just mint that trillion dollar coin and make everything right, after all the taxpayers will be on the hook either way. Real Estate Economy Watch notes the new requirements:

Beginning April 1, 2013 new FHA borrowers will pay as much as 1.55 percent for annual FHA mortgage insurance, and for the first time ever, they will pay the FHA mortgage insurance premium (MIP) for the entire life of their loan. The MIP is split in two parts. The first part is called “upfront mortgage insurance” (UFMIP) and it’s a one-time payment that is made at closing. UFMIP is traditionally added to the loan size, and is not used in loan-to-value (LTV) calculations for an FHA loan.

The FHA will continue to assess upfront mortgage insurance premiums at 1.75 percent of the loan size for all new borrowers, or $1,750 for every $100,000 borrowed. This is the same rate at which the FHA currently assesses UFMIP. The second part of FHA mortgage insurance is known as the annual mortgage insurance premium (MIP). Annual MIP is paid monthly as part of the regular mortgage payment. After April 1, the annual MIP will increase for the majority of new mortgages by 10 basis points, or 0.1 percent. This is expected to add $13 a month to the average borrower’s monthly payments.

FHA has automatically canceled required premium payments after loans reached 78 percent of their original value…until now. New borrowers will have to pay required annual mortgage insurance premiums for the life of the loan. Unlike upfront mortgage insurance premiums, annual MIP payments vary based on your loan term, your loan-to-value, and your loan size. The agency estimates it lost billions of dollars in premium revenue on mortgages endorsed from 2010 through 2012 because of this cancellation policy.

A post in December titled FHA Sowing the Seeds for Next Collapse illustrated just one of the problems FHA buyers face, these changes just make their hole deeper:

Fees associated with FHA mortgages are already notoriously high in spite of their reputation as the mortgage of choice for lower income borrowers. Even at today’s lower interest rates, FHA loans carrying a 30 year term with a 5% down payment will cost the borrower about 2.5 times the total amount borrowed over the life of the loan. The cold math is clear; it’ll take about 12 years before you pay more principle than interest, since most FHA loans don’t get close to that owners are often shocked to find out how much they still owe on their home loan. A 100K 95% LTV will cost around 250K over the full 30 year, 360 payment period.

Any buyers sitting on the fence right now that know an FHA loan is in their future should look into this right away. Call your lender and have them explain exactly how this might impact you.

 

And then there's FNMA. Chatter abounds about their increasing role with short sales; specifically if they are helping or hurting the homeowners. AGBeat wonders aloud, Is FNMA if forcing owners into foreclosure?

On November 1, 2012, Fannie Mae and Freddie Mac stated that they would have streamlined guidelines for the processing of short sales. Those guidelines stated short sales would be processed in no more than 60 days, as many of the tasks that were previously delegated to Fannie Mae and Freddie Mac could now be handled directly by the servicers. Yet the irony is that the valuations are still coming back too high, forcing distressed borrowers into foreclosure. Mortgage servicers could now quickly decline short sales within the 60-day “streamlined” period.

When Fannie Mae lists an REO, the property is generally listed above the current market value. They advertise the property and review all offers but prefer for borrowers to obtain a HomePath® loan. With the Fannie Mae HomePath® loan, no appraisal is required. With no appraisal, the buyer could pay 10% or even 20% over market value. The new owner of the Fannie Mae REO now owns a property with a loan more than market value; the owner is now upside down like the short sale seller that couldn't get his short sale approved just a few months before.

Should anyone be surprised about any of this? Are buyers even aware of what's going on with FHA?

Comments (3)

Karen Anne Stone
New Home Hunters of Fort Worth and Tarrant County - Fort Worth, TX
Fort Worth Real Estate

Hank:  So tell me.  Just where would you like the money that these fees raise to come from if not from the folks who use these programs?  Perhaps we need a TAX?  Well, you know how well that would go over.

Noper, I think it's in the right place... in with the costs on an FHA loan.

Feb 25, 2013 02:15 AM
Hank Miller, SRA
Ansley Real Estate/Christie's International - Roswell, GA
Associate Broker & Certified Appraiser

I don't disagree, add the fees to the people using the service. However, we both know that with FHA digging a huge hole like this that a few bucks isn't going to make a dent. Loans that will default continue to be made and sooner or later, the tax payers will be writing yet another check.

FHA has replaced the subprime lenders and they're doing it with the government's blessing. Instead of raising the bar and the mortgage industry saying "NO" to unqualified buyers, the government allows FHA to say YES to buyers that they know will default.

FHA was never designed to operate like this...while I don't know the answer given this mess, I do know the first thing is to actually qualify buyers, not just go through the motions. Alas, that's not likely politically expedient though.

Feb 25, 2013 02:28 AM
Steven Cook
No Longer Processing Mortgages. - Tacoma, WA

Hank -- my sister-in-law and her husband are looking to buy -- and ran into one of those HomePath situations.  They would have had to pay @25% over the market to get into the home, which needed major fix up.  Paying that much more would not have left them with enough funds to do the repairs.   They passed.

Feb 25, 2013 03:56 AM