Mortgage Group Calls for Reducing FHA Annual Premiums

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A trade group representing small and midsized community-based mortgage lenders is urging the Obama administration to reduce the 1.35% annual premium on Federal Housing Administration-insured mortgage purchase loans.

The high annual premium "directly affects debt-to-income ratios making loans and home purchases less affordable," according to the Community Home Lenders Association.

The Federal Housing Administration has increased the annual premium over several years to cover loan losses and to recapitalize the FHA mortgage insurance fund.

However, the annual premium is now the highest in FHA's history and FHA is estimated to net a $14 billion profit in fiscal year 2014, which ends Sept. 30.

"We think it is time to ease up on the heavy annual premiums that are becoming a drag on home purchase affordability," said Scott Olson, the trade group’s executive director.

In December, FHA endorsed 73,200 single-family loans, 67% of which were mortgage purchase loans. The Community Home Lenders Association said it is not proposing to reduce premiums on FHA-backed refinancings.

The trade group suggested reducing the 1.35% annual premium to 0.7% or 0.5% for borrowers that complete pre-purchase homeownership counseling. To recoup some of the reduced premium income, it also suggests hiking the current 1.75% upfront premium to 3%.

"This [upfront premium] increase would likely recoup around 40% of the loss of the annual reduction, thus cushioning the financial impact" the group says in a letter to the White House Office of Management and Budget.

The high annual premiums have been manageable thanks to low mortgage rates. As rates move higher, the lenders group's members are concerned it will make it tougher for homebuyers to qualify for a FHA loan and become a drag on the housing recovery. Overall, the trade group is proposing a shift in FHA revenue from the annual premium to the upfront premium.

Relying too heavily on the upfront premium can reduce FHA receipts by pricing "borrowers out of the home purchase market," according to the Feb. 18 letter to OMB.

The group also warns that it may be a short-sighted policy that will encourage FHA borrowers to refinance after four or five years.

"Excessive annual premiums can also lead to borrowers refinancing out to other loan sources as the loan matures—precisely at the point in time when FHA loans are safest—thus depriving FHA of revenue when the loan is paid off."

Comments (5)
Sabrina, the government does not want out of the mortgage business, just the opposite, they want it to grow, it is a cash cow to them, it gives them the right to stand up and say "look what we did; we stand for the little guy" Low down payment home loans, student loans, free health care.
The higher fees are being used to offset the losses on the reverse mortgage program, they are losing millions as the original people die off and the family wants nothing to do with the house that is now tens of thousands of dollars underwater.
Believe it or not, the same HUD Official I spoke with blamed the higher fees on....wait for it....Bush and the Nehemiah loan program from 10 years ago. The same one Bush tried to stop and Barney Frank and crew stepped in to protect.
Posted by Rick | Thursday, February 20 2014 at 11:31AM ET
Robert, I agree 100% with your comment. The CFPB has gone after brokers to put a 3% cap on our income because they said we add too much cost to the purchase of home! Forgive me, but how much additional cost is FHA earning with their upfront fee and life of loan monthly fee? Sure the client can refinace later to get out of the PMI, but more than likely at a higher interest rates. Tell me...who is adding unnecesary fees to the cost of home ownership? I try very hard to keep clients out of the FHA program and only use it is an option of lat resort because of the high PMI life of loan monthly fee. Scrape together another 2% down and get conventional financing.
Posted by TRACI R | Wednesday, February 19 2014 at 3:48PM ET
If the federal government really wants out of the mortgage lending arena they simply could not have made a stronger statement in the most subtle way!
Posted by Sabrina T | Wednesday, February 19 2014 at 1:32PM ET
What they did not say is the MIP cost has been jacked up 5 times in less than 5 years, according to a HUD official I spoke with last year they felt they were "losing" money by letting people cancel their monthly MIP once they reached 22% equity. My question is; when did the government got into the business to make money? If a PMI company made that statement the Justice Department would be at their front door in the morning.
The cost of MIP has made using a FHA loan a non-viable option to anyone who has the means to put down as little as 5%. The only people now using FHA are those with limited assets and those with poor credit or credit history.
Posted by Rick | Wednesday, February 19 2014 at 10:49AM ET
Add your comments here.
Posted by Robert C | Tuesday, February 18 2014 at 3:02PM ET
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