FHA/HUD CAN ONLY BLAME THEMSELVES

FHA/HUD CAN ONLY BLAME THEMSELVES

I read today that FHA loans are down 53% from last year in the first quarter. HUD (FHA) like other loan guarantors was hit hard with foreclosures over the last few years. Their remedy to bring money into the coffers has been to increase the monthly MI rate from .55% to 1.35% on 30 year mortgages and up front MI from 1.5% to 1.75%. And, adding to that make the monthly MI permanent on some loans.

Some History

Prior to 2007 a lot of folks were put into subprime loans that could have qualified for FHA loans. This was done for two reasons. (1) The subprime loan paid the originator more  (2) The lender did not have FHA to offer.

When subprime loans failed FHA reappeared as the go to product for those with less than stellar credit. PLUS conventional loans were in the early stages of having to use a blind third party to order appraisals whereas FHA appraisals could still be ordered directly by the originator from their appraiser of choice.

This combination of events caused a huge increase in FHA origination in 2008 and 2009. As these loans began to fail ( I predicted this would happen) HUD took huge losses.

Then vs Now

Going back to the MI rates/issues, over time we've seen the up front MI and the monthly MI change; it is variable.  I've seen the up front MI rate over 2% and that did not deter FHA volume. The problem FHA has now is that the monthly MI at 1.35% is  high. FHA MI is permanent for those with minimal down payments.

Contrast this with a conventional loan that allows the borrower to cancel MI after they get 22% equity. Monthly MI can be lower. Further some lenders now have a minimum 5% down 100% gift conventional loan. 

When you add up the additional monthly MI plus the cost of keeping MI for the life of a loan when a buyer puts down less than 10% on a 30 year note, a buyer saving 5% for a down payment vs FHA's required 3.5% is a no brain-er. In the long run they will be better off with a conventional loan.

FHA/HUD has no one to blame but themselves for the lack of money in their coffers. There are still buyers for whom FHA will be the best option, but for many it is not the go to product. HUD should realize with the current set up they will only get the less qualified buyers.  The smart thing to do is go back to monthly MI that can be canceled. Then they will compete for the better borrowers.