Last week the House of Representatives passed a bill giving HUD the OK to increase the monthly mortgage insurance on FHA loans to 1.55% from the current .55%. Huh? This is really extreme, and to me is akin to FHA taking itself out of the market!
FHA losses
The losses must be so steep at FHA that they simply can’t handle much more volume.
FHA usage
FHA, during the real estate boom of 1999-2006, was used sparingly. Buyers seemed to have lots of money, sellers did not like dealing with FHA loans, and as a result it was probably responsible for less than 5% of our marketplace. After the real estate market changed, use of FHA loans spiked, and now may account for 40% of local loan volume. And it has been said that FHA has been the dumping ground for poorly qualified buyers, since there are no sub-prime loans anymore, so I can understand why the losses are mounting at FHA.
What does this mean?
This new bill will significantly increase a borrower’s monthly payment. I’ll give you an example:
Let’s assume a home with a sales price of $500,000.
Under current FHA guidelines, the monthly mortgage insurance would be $221/month.
Under the new proposed rules the payment would be as high as $623! This is the same thing as increasing the mortgage rate from 5% to over 6.25%.
$221/month in mortgage insurance cost was bad enough, NO ONE will pay $623/month, NO ONE. And effectively, we can all wave bye-bye to FHA loans if this bill passes.
Recent news
FHA recently raised their up-front mortgage insurance premium (this is financed into the loan, and is paid on top of the monthly mortgage insurance cost) by .50%, from 1.75% to 2.25%. That I understood, and I thought that was the solution to replenish the insurance fund to keep FHA in the black. I guess that was not anywhere near enough…
The government is taking away the punch bowl at the wrong time, in my humble opinion. Maybe they could take some more punch out of the bowl, but they have effectively knocked the bowl off the table with this move! We’ll see what happens with this legislation, and I’ll comment on it again as needed.
Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.
so when does this become effective? do FHA loans in the pipeline have a grace period?
Hello Charlie, this legislation still needs to fully pass. And when it does I am sure they will grandfather in any existing FHA loans that are already locked-in. Brian.
Any FHA loans in the pipeline are fine. When it takes effect (possibly in October now), it will only affect newly locked-in loans as of that date it takes affect.
This FHA mortgage insurance increase will not affect existing FHA loans, only new loans starting after the changes take affect.