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HUD secretary Shaun Donovan may repeal a government policy that allows FHA borrowers to cancel mortgage insurance premiums when the LTV ratio on their loan falls below 78%.
HUD secretary Shaun Donovan may repeal a government policy that allows FHA borrowers to cancel mortgage insurance premiums when the LTV ratio on their loan falls below 78%.

FHA Moving Quickly to Repeal MIP Cancellation Policy

DEC 7, 2012 1:29pm ET
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HUD secretary Shaun Donovan this week signaled his intention to repeal a government policy that allows FHA borrowers to cancel mortgage insurance premiums when the LTV ratio on their loan falls below 78%.

The move comes amid the cash-strapped Federal Housing Administration looking for ways to preserve its resources.

The FHA’s Mutual Mortgage Insurance fund potentially loses billions of dollars in premiums due to the LTV cancellation policy. (Private mortgage insurers allow for policy cancellations when the LTV reaches 80%.)

Secretary Donovan said he intends to make the policy change soon, but did not offer a specific time frame.

An analysis by FHA’s Office of Risk Analysis shows that the federal mortgage insurance program will lose $10 billion to $12 billion on its fiscal year 2010-2012 books of business because of the cancellation policy.

“The same analyses also suggest that 10% to 12% of all claims losses will occur after MIP cancellation,” according to the secretary’s testimony.

HUD is currently drafting a mortgagee letter to repeal the cancelation policy. The change will apply to newly originated loans.

Donovan told the Senate Banking Committee Thursday that the revenue impact of this new policy will be “substantial” for the financially strapped FHA mortgage insurance fund due to the low interest rate environment.

The low mortgage rates will lead to “faster amortization of the principal,” he said. The new loans “will be on our books for a long time,” he added.

However, analysts at FBR Capital Markets expect FHA’s move might encourage refinancings.

“We believe that the policy change that requires FHA insurance premiums over the life of the loan could produce support for additional refinancing activity from the FHA to loans securitized by Fannie and Freddie. This would allow borrowers to remove an annual premium of 1.35%,” the FBR analysts write in their report, “Future of Housing & Mortgage Markets: Winners & Losers.”

The Federal Housing Administration is in the process of increasing its annual premium by 10 basis points, which means new borrowers will be paying an annual premium of 135 bps.

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