FHA MIP Increase

If borrowers with bad credit and subprime are responsible for the mortgage meltdown and FHA's pending insolvency, then why are there so many borrowers with 700+ credit scores defaulting?  Most every borrower that contacts me has negative equity and can't maintain their debt loads.  I've only encountered a few that had bona fide hardships and inability to manage their debts.  I do not engage in paid foreclosure consulting.  Most people who are talk to are friends, associates, and their friends and associates that ask me for help.  There are also a mass of people who track me down who have been scammed by loss mitigation companies and attorneys, and have nothing left.  

When borrowers have negative equity, can't make ends meet, and are overwhelmed by debt, they strategically default.  Yes, even borrowers with perfect credit and excellent scores.  To blame FHA's woes on borrowers with bad credit is to spread misinformation.  

There are 5 "C"s to underwriting risk and they are: Character (credit), Capacity (ability to repay the obligation), Collateral (security for the debt), Cash (down payment, reserves, capital), and Conditions (economic/market conditions).  There is not one factor that should ever be discarded or ignored.  These are the fundamentals of risk.

The first thing that HUD needs to do is follow the OIG's recommendation to determine appropriate front and back end debt ratios.  Not based on performance data during the boom, but moreover, during the bust.  This is actually just common sense 101.  Next, they need to make revisions to FHA TOTAL Scorecard that is in compliance with 24 CFR 203.33 and does not serve as a proxy for fraud.

Next, HUD needs to evaluate a fair MIP/annual MI structure for streamline refinances and determine whether there is a modicum of leeway in increasing loan amounts to at least absorb recurring costs.  A modest increase to MIP annual premiums of approximately 15 basis points from the existing premium plus a new premium not to exceed 1% of the loan balance would fair.  This could enable more refinances which would lower debt ratios of struggling borrowers while resulting in an increase in FHA revenues.  Given the higher interest rate environment predicted in the FHA Actuarial Review, anyone could complete spreadsheet calculations to show that unless there is a substantial decline in interest rates, the increased MIP and mandatory 5% P & I/MI reduction requires significantly lower rates (in a no cost loan environment) to result in meaningful levels of refinance activity (and increase to FHA revenues through additional premium earnings).  This is math 101.  Unless we see reversals in commodities speculation and a down turn in the market driving a flight to quality (in addition to currency market disruption), it is unlikely that we will obtain the interest rate relief needed to fuel significant refinance activity.  Thus far, ZIRP has been effective in creating forced diets via out of control food and fuel inflation.  Clothing is next based on cotton and other related commodities.  A rate spread of 1.5% or higher suppresses refinance activity at a time when refinance activity could yield HUD greater premium revenue while providing Americans much needed debt relief.  

Next, HUD needs to focus on loss mitigation and implement MANDATORY policies.  For anyone who doubts the lack of effective loss mitigation, I invite you to spend a little time on HUD Neighborhood Watch to verify for yourself how truly dismal FHA servicing and loss mitigation really is.  You will find servicers with a 40% delinquency and default rate, and a shortage of loss mitigation actions- especially in regard to FHA-HAMP.

Next, you roll up your sleeves and get to work with consumer groups and create innovative programs to recycle foreclosures to the underserved and create rental housing opportunities.  Borrowers that participate in non profit education and programs (6 months in duration) should be allowed to participate in savings matching programs. Instead of Seller Funded Down Payment Assistance, how about a Seller-Funded Guaranty program?

Instead of the business as usual approach to business, ad glossing over the true crisis with the FHA Fund with default statistics that could have only been pulled out the sky, how about getting real with the public and taxpayers.  The reality is that testimony is not in line with facts and that is plain wrong.  The way that I was raised, misrepresenting and skewing facts is lying, and frankly I'm appalled by the testimony of HUD officials to elected officials.

Additionally, to hedge discrimination that create barriers to the underserved and minorities, it is time to implement a Credit Watch Termination Initiative that makes sense.  Create base line expected default rates and base compare ratios on composition of risk factors for every lender's portfolio.  Additionally, create minimum and maximum underwriting criteria so that industry professional and borrowers can provide borrowers and the industry assurances that borrowers who meet minimum FHA guidelines can actually be financed.   

Mr. Stevens, although I may come off as your worst critics, but I am actually your biggest fan.  You have the capacity to be the greatest and most effective FHA Commissioner in the history of FHA.  But, you have to put borrowers and America's best interest above big institutions.  

I apologize for the typos and poor editing of my prior post.  I wrote my response quickly and passionately, and will the full expectation of being able to edit.  Aside from the myriad of typos and left out words, I meant to say flight to safety and not flight to quality.  The point I was making there is that a much lower interest rate environment is needed to generate refinances and increases to MIP revenues;  My data before the 25 bps increase to annual MI showed a .625% to 1.25% difference between the current rate to new rate (depending on seasoning and amortization) to make refinancing feasible based on the increased MIP and mandatory payment reduction.  Basing the 5% payment reduction on PITI averaged out to about an .125.  Relaxation of the PITI requirement to be based on P & I an MI relieved about .125% from the required rate, but this was more than offset by the .25% increase to annual MI.  Historically, HUD has mitigated MIP and MI increases on FHA streamline refinances to prevent changes in MIP structures from impeding refinances.   

I do not want to see existing borrowers who are already struggling to perform on their mortgages burdened by an additional 1% upfront MIP and a 50 bps increase to annual MIP.  The loans are already insured, and 1 in 5 borrowers are delinquent or in default on their FHA loans.  No way should these borrowers shoulder the cost of defaulting borrowers just so the same irresponsible practices that withstand housing inflation can continue.  

Consider this, if the government was openly and notoriously conspiring to hold up food and fuel prices such as HUD has been in regard to housing inflation, cities would riot.  

Krista Railey and Chris Kenworthy: Thanks for your analysis and comments, I learned from both of you too especially.  I would love to work with you!  This conversation is intelligent.  

From my limited point of view, as a loan originator just getting back into this business after a hiatus: Most borrowers here in California already can't refinance to a lower rate because they are upside down, now in calculating benefits of refinancing to a lower rate with the increased MIP rates, even fewer can benefit from current low interest rates, even if they have the equity.

First time buyers will not be affected as much, because rates are still low and home prices are still low.

The biggest problem for my renters with 620-640 scores is the requirement for proof of a 12 months with no 30 day lates on their rent.  It seems that a lot of the buyers are paying cash and living with a relative to save up to get into a home.

So... FHA increased the MIP as predicted.  The thing is, the reason that their reserves are lower is because they fiddled with the MIP a while ago dropping the 2.25% up front MIP down to 1%.  When they did this, they actually LOWERED the amount going into the MIP fund, and  increased the borrower's payment at the same time!  So (duh) if you are collecting LESS money up front, the amount of money you have will be LOWER.  This is what I wrote originally:  

Why are we changing the FHA MIP?

Ok, I'm the first to admit that I'm not a mathematical genus.  I've said for years that it only takes 3rd grade math to be a lender, which suites me perfectly.  So when I heard that FHA's changing their mortgage insurance to increase their MIP reserves (scheduled to go into effect October 4th of this year) I just assumed that they would take steps to increase the amount collected to accomplish their goal.  I've run the numbers and for a typical FHA borrower the monthly payment will go up by about $23 per $100,000 in sales price at today's rates.

I can understand HUD's concerns.  FHA is a major player in today's housing arena.  It provides financing for people with less than perfect credit, and who do not have as much money for a down payment.  Increasing the MIP fund's health is in everyone's best interest.  Here' the problem.  THE NEW SYSTEM WILL DRAMATICALLY DECREASE DEPOSITS INTO THE MIP INSURANCE FUND!  No, really, it's true.  This is because they DECREASED the amount they are collecting up front - money that goes directly into the MIP insurance fund at close of escrow, and raised the annual premium.  Based on my ability to do basic 3rd grade math, I've calculated that it will take almost 4 years before the increase in annual premiums will give HUD more money than they would have under the current plan from a loan done TODAY.  That's assuming that the loan does not go into default, or that the borrower doesn't sell or refinance out of FHA before then.

Here's how it works.  Currently FHA collects 2.25% up-front MIP that is added to the loan amount, and charges monthly MMI at .55% per year.  That 2.25% goes directly into the MIP fund when the loan is insured and then collects monthly MMI premiums at a .55% annual rate.  The new factors call for a 1% up-front MIP and monthly MMI to be between .80 and .90 - depending on who you listen to.  I used the .90 MMI - which is the highest annual premium I've heard - in my example below.  These numbers are based on a $100,000 base loan, maximum loan-to-value.  Amounts deposited decrease because the monthly MMI is based on the loan balance.

                               Old Method                                New Method              

                               Deposited         Total to Fund   Deposited        Total to Fund    Difference

At close              $2,250             $2,250               $1,000               $1,000               $1,250 less

After 1 year      $   550              $2,800               $   900                 $1,900               $   900 less

After 2 years    $   541              $3,341                 $   885                  $2,785              $   556 less

After 3 years    $   531              $3,871                 $   870                 $3,655               $   217 less

After 4 years    $   522              $4,394               $   854                   $4,509               $   115 more     

 I'm not taking into account the present value of money that would probably show that the MIP fund is still not even after 4 years; that's too much and I'm trying to keep this to 3rd grade math.  I'm also not calculating how long it will take for the MIP Insurance fund to actually see a benefit - if it ever will!  There are way too many factors to consider, but I really don't see any way the fund's reserves increase under the new plan - ever!

 So what am I missing?  I really can't see any benefit to the MIP fund - in fact deposits to the MIP fund will immediately go down - and the buyers will be paying a higher payment.  It appears to me to be a lose-lose proposition.  Can they really be that stupid, or am I missing some significant fact?  I would really like to know where my logic is flawed.  Really!  I hope I'm absolutely wrong on this, but I can't figure out how.  Posted 8/19/10 on SacRELender.com

Invisible Hand, reduction in DTI would have a significantly greater impact in correcting housing prices.  Raising premiums is just a ploy to avoid doing that.  

Bob Willet, very shrewd post.  The increase to the MI fund can only be accomplished through refinancing within the FHA portfolio.  Check out the numbers.  The increased MI on refinances would substantially increase current HUD revenues.  However, it would require a record number of refinances- mostly on older loans that are not subject to FHA MIP refunds.  The interest rate spread required to achieve the 5% P & I and MI reduction is significantly less for seasoned loans where the borrower has paid down principal vs a new loan that would involve a MIP refund.  Even so, it would still require a substantial reduction in rates especially considering that most borrowers would require a no cost loan.

The purpose of reducing the upfront premium is to reduce loan amounts and default severity.  There is also a limit on maximum LTV including financed MIP.  See HERA.  

The increase in the FHA monthly premium will have a negative affect on the FHA reserves because less people will be using the loan. because less people will be able to qualify. I equate this to taxing people and business more and having less people paying into the fund because less people are working. I do believe scorecard needs to be revised, because 50% DTI is ridiculous, but increasing the monthly MIP is NOT the right course of action. Better credit scores and lower DTI will get you better borrowers, and less defaults