mortgage insurance costs

In order to increase its reserves to cover loan losses, and to avoid asking Congress for money for the first time in its history, FHA has announced tightening lending standards and higher mortgage insurance fees.

Over the past couple years, FHA has seen its market share of mortgages increase from less than 10% to 30 – 40% of all new mortgage originated. This increase in the number of loans insured, coupled with the increase in defaults and foreclosures over the past couple years, has decreased FHA’s loan loss reserves to below the congressionally mandated minimum of 2%.

In order to increase these loan loss reserves and keep FHA headed in the right direction, FHA will be implementing the following changes:

1. FHA will increase the Upfront Mortgage Insurance Premium (UFMIP) from 1.75% to 2.25% of the mortgage amount. This premium, which can be rolled into the total amount financed, will increase the UFMIP on a $200,000 mortgage from $3,500 to $4,500. Since this premium is financed, it will not have a huge impact on borrower’s ability to afford a mortgage or their monthly mortgage payments.
2. FHA will now require all borrowers to have a minimum FICO score of 580 to qualify for FHA’s minimum 3.5% down payment. Borrower’s with FICO scores below 580 would be required to have a down payment of at least 10%.
3. FHA will reduce the allowable seller’s concessions from 6% to 3%. Sellers often pay for the borrowers closing costs and/or points on their mortgage. The reduction in these concessions is to prevent sellers from increasing the sales price of the home drastically to cover the cost of the concessions.
4. FHA will increase enforcement on FHA lenders. FHA will increase monitoring of FHA lenders to make sure they are operating in a responsible manner.

According to FHA Commissioner David Stevens, “Striking the right balance between managing FHA’s risk, continuing to provide access to underserved communities, and supporting the nation’s economic recovery is critically important. When combined with the risk management measures announced last year, these changes are the most significant steps to address risk in the agency’s history. Additionally, by continuing to provide affordable, responsible mortgage products, FHA will support the housing markets recovery.”

There are mixed views as to the impact these changes may have on the housing market. According to Ivy Zelman, CEO of Zelman & Associates, a housing-research firm, “The FHA tightening arguably has no bite and is clearly a non-event.” Howard Glaser, and industry consultant, had a different view saying, “Mortgage lenders will find the new rule as painful but necessary. He continued to say the rules were necessary due to the fact that there is an “anything goes” environment in recent years due to many subprime lenders moving into FHA lending.

FHA’s Stevens said that he expected FHA’s performance will see “bumps and bruises in the months ahead” but was “headed in a positive direction.”