This week, Congress has passed H.R. 5981 and it's headed to the President's desk. There are some major FHA changes associated with this bill that gives FHA the authority to raise the annual mortgage insurance premium that is supposed to bring in $300 million more on a monthly basis to FHA.
So how does this affect the borrower?? The good news is that they plan to decrease the upfront mortgage insurance to 1%, down from 2.25%. The bad news however, is that monthly cost for mortgage insurance is going up from a factor of .55 to .90 for a 30 year loan.
That probably doesn't sound like a lot to most people, so let's put that into real numbers.
Let's take a look at an example of a purchase price of $150,000:
For an FHA loan BEFORE Octoberber 4, 2010
Upfront Premium (2.25%) - $3256.88
Monthly payment including mortgage insurance - $793.93
For an FHA loan ON OR AFTER October 4, 2010
Upfront Premium (1.00%) -$1447.50
Monthly payment including mortgage insurance - $826.93
As you can see, while the upfront cost goes down by $1809.38, the overall increase in payment is $33 / mo.
While I can agree that changes to FHA must be made to ensure that FHA stays solvent and remains an option for borrowers looking to obtain financing, I disagree with the way they've chosen to do it. I would've rather seen an increase in the upfront premium, possibly to 3.5%, which would have a more immediate impact to the mortgage insurance reserve fund. In just this example, that would have given FHA an additional $1809.57 for the up front premium. This option would've also have less impact on the number most borrowers are concerned with...the monthly payment. The upfront premium is typically financed back into the loan, and in the same example would've only raised the payment to the borrower by $8.91.
Someone help me out if I'm wrong, but based on my calculations this new option actually decreases the amount FHA will bring in the first year by 32% and it will be into the 4th year of the loan before the revenue generated would equal what the current system would. This does not take into effect early defaults, refinances, and payoffs. Another question is that if FHA is trying to lower the number of defaults, why would they want to raise a borrower's monthly payment? Of course, they didn't consult me.
These FHA changes will go into effect October 4, 2010 and a new Mortgagee Letter will be sent out once the President signs the bill.
Check out these other great posts by Jeff Belonger and Travis Newton to see the effect of these FHA changes on some different purchase prices.
Click here to read the original letter by David H. Stevens - Secretary of HUD/FHA Commissioner
Comments(4)