The new premium structure for FHA-backed single-family loans will increase receipts by $1 billion per year to bolster the government's mortgage insurance fund, keeping it out of the red. But it could also reduce demand and curtail FHA lending by 30% by the end of fiscal year 2013, according to new projections.
Department of Housing and Urban Development secretary Shaun Donovan told Congress recently that he tried to balance the needs of the FHA fund without “impeding the housing recovery.”
The nation's housing secretary noted that premium increases are higher on FHA jumbos with loan balances above $625,500, which should “encourage private capital to come back” to the mortgage market. The maximum loan limit on FHA loans in high-cost areas is $729,750.
FHA currently charges a 100 basis point upfront premium and a 115 basis point annual premium on forward mortgages with loan-to-value ratios north of 95%.
Starting April 1, FHA will hike its upfront premium by 75 bps to 175 bps on all single-family loans, including jumbos. FHA is also hiking the annual premium on loan balances of up to $625,500 by 10 bps starting April 1, as required by Congress.
The new 175 basis point upfront premium can be financed into the loan amount, while the 125 basis point annual premium can be added to the mortgage rate.
Donovan told a Senate panel last week that the hike in premiums on a typical FHA loan will increase the borrower's monthly payment by about $15.
On higher-balance jumbo loans, FHA plans to implement a 35 bp hike in the annual premium June 1.
Lenders originated $17.1 billion of “forward” FHA loans in January. It was the first time since August that FHA endorsements exceeded $16 billion.
FHA estimates it will endorse $231 billion of single-family loans (excluding reverse mortgages) in fiscal year 2012 (which ends Sept. 30) and $150 billion in FY 2013.
Meanwhile, HUD is planning to reduce premiums on refinancings of existing FHA loans to improve the performance of its legacy loans.
“FHA is working on adjusting the premium structure for all streamline refinance transactions that are refinancing FHA loans endorsed on or before May 31, 2009 to further incentivize refinance activity,” Donovan told the Senate Banking Committee.
The agency is expected to reveal the new streamline refinancing premiums soon.
FHA consultant Brian Chappelle expects to see a significant reduction in the premiums to incentivize the refinancing of about 20% of FHA's insured portfolio.
“As part of the president's broad-based refinancing initiative, they are going to dramatically lower the premiums for streamline refinancings,” he said. Chappelle is a co-founder of Potomac Partners in Washington.
However, it isn't clear what FHA will charge on streamline refinancings of FHA loans originated after May 2009.
Some are concerned those borrowers will have to pay the higher premiums that go into effect April 1. That would make refinancing more expensive or impossible for some borrowers who have seen the value of their homes decline.
