Noncancellable Insurance Crimps FHA Loan Volume

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Higher mortgage rates along with a new Federal Housing Administration policy that kicked in recently could hurt the purchase market as well as refinancings.

Starting June 3, new FHA borrowers must pay annual insurance premiums of 1.35% for the life the loan. This raises the cost of newly originated FHA loans (with LTVs above 90%) because annual premium can no longer be canceled.

The Mortgage Bankers Association weekly application survey shows the government’s share of the purchase market (FHA, VA and Rural Housing loans) has fallen to 28% in June, compared to over 40% early last year.

“Retaining the premiums for the life of the loan led to the latest step down in the government’s share in June,” said MBA vice president Michael Fratantoni.

The MBA reported Wednesday morning that the government refinance index fell 12% from the previous week.

In April, FHA raised its premiums by 10 basis points. And FHA commissioner Carol Galante warned Senate Banking Committee members further premium increases would hurt the FHA and future homebuyers.

“We have already increased premiums five times very significantly and we are clearly at a tipping point here,” Galante testified. “If we increase them more, we would actually shut out additional homebuyers,” she said.

May data released by FHA show that over half (52%) of FHA loan volume during the first eight months of FY 2013 involved refinancings.

Meanwhile, Fannie Mae and Freddie Mac monthly reports show refinancings comprise 70% to 80% of their loan volume.

“With refinancings falling, it is going to shine a light on the government’s—particularly the GSEs—lackluster support for the purchase mortgage market,” said mortgage consultant Brian Chappelle.

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