Will FHA become the “loan of last resort”?

In an effort to strengthen the FHA insurance fund and reduce FHA’s share of the market, HUD raised the annual Mortgage Insurance Premium (MIP) by 10 basis points. The new premiums became effective with case numbers assigned on or after April 1, 2013 (see below).

More changes to mortgage insurance premiums will take effect with case numbers assigned on or after June 3, 2013. The annual premium will no longer cancel at 78 percent loan to value (see below).

These changes bring some concern that FHA may become the “loan of last resort”, putting further strain on the insurance fund. In 2012’s book of business, FHA’s average credit score was about 700.

As a result of the new premiums, a borrower with a credit score of 680 and a down payment of 3 percent would pay considerably less for conventional monthly private mortgage insurance than with a FHA loan requiring a down payment of 3.5 percent.

At a credit score of 660 and a down payment of 5 percent, conventional PMI will still be lower.

Combine this with the fact that monthly conventional PMI does not have an up-front premium, as does FHA. Consider also that conventional PMI drops off at 78 percent LTV, which will no longer be the case with FHA.

This could spell disaster for the FHA program. The private mortgage insurance companies are making a huge comeback by bringing the issue of the lower cost of conventional PMI versus FHA MIP front and center.

Only borrowers with low credit scores, shorter periods since bankruptcies and foreclosures, non-occupant co-borrowers, and other high risk scenarios would have a reason to look to FHA for their financing.

Without the higher credit score loans to balance out the portfolio, the default rate could get higher than ever.

If FHA is to survive, they will need to go to a system that rewards good credit. This can be accomplished by offering an insurance premium that is lower, not higher, than private mortgage insurance for borrowers with higher credit scores.

Stay tuned.

As of April 1, 2013:

  • FHA loans with terms greater than 15 years and a loan-to-value (LTV) greater than 95% went from an annual premium of 125 basis points (1.25%) to 135 basis points (1.35%).
  • FHA Loans with terms greater than 15 years and a loan-to-value less than or equal to 95% went from an annual premium of 120 basis points (1.20%), to 130 basis points (1.30%).
  • FHA loans with a term of 15 years or less and a loan-to-value greater than 90% went from an annual premium of 60 basis points (.60%) to 70 basis points (.70%).
  • FHA loans with a term of 15 years or less and a loan-to-value of 78.01% to 90% went from an annual premium of 35 basis points (.35%) to 45 basis points (.45%).

As of June 3, 2013:

  • FHA loans with a term of 15 years or less and a loan-to-value of 78% or less currently have no annual premium associated with the loan. Those loans will have an annual premium of 45 basis points (.45%) for 11 years.
  • FHA loans with a term of 15 years or less and a loan-to-value of 78.01% to 90% will no longer have the MIP cancelled when the balance reached 78% LTV. Those loans will have an annual MIP payment for 11 years.
  • FHA loans with a term of 15 years or less and a loan-to-value of greater than 90% currently have the MIP cancelled when the balance reaches 78% LTV. Those loans will have an annual MIP payment for the life of the loan.
  • FHA loans with a term greater than 15 years and a loan-to-value equal to or less than 78% LTV currently would have an annual premium for 5 years. Those loans will have an annual premium for 11 years.
  • FHA loans with a term greater than 15 years and a loan to value of 78.01% to 90% currently have the MIP cancelled when the loan balance reaches 78% LTV, but in not less than 5 years. Those loans will have an annual premium for 11 years.
  • FHA loans with a term greater than 15 years and a loan-to value greater than 90% currently have the MIP cancelled when the loan balance reaches 78% LTV, but in not less than 5 years. Those loans will have an annual premium for the term of the loan.