FHA may be about to change again. In a vote of 406-4, the House of Representatives passed a bill that, if passed by the Senate, will increase the monthly mortgage insurance for FHA loans. Over the last 2 years FHA has gone from being a bit player in the housing market, to the main choice for most first time home buyers, and now makes up about 40% of the overall loan volume. Because FHA has increased market share so quickly, and as a result of all the stress in the housing market, loan defaults have become a real problem. Some critics of the program have said that the higher default rate is a result of FHA making bad loans. The truth is more complicated. FHA, though it is a government program, has been self sufficient since it started, and uses the mortgage insurance premium that it charges to cover any losses from bad loans. This mortgage insurance (MIP) is broken into 2 parts. One part of is Up-front mortgage insurance which is a lump sum that is financed into the loan. The other part is an annual premium that is paid monthly, just like conventional mortgage insurance. This mortgage insurance has always been enough to keep the program solvent, so unlike Fannie Mae, Freddie Mac and all the big banks that make mortgages, FHA has stood on their own 2 feet and haven’t required a bail out to stay in business. But with the housing market still rocky, FHA management is moving to make sure they keep their reserve levels high, and this means raising their MIP.

Last year FHA raised their Up-front MIP requirement from 1.5% of the loan amount to 2.25% (again, financed into the loan). The new bill focuses on the monthly premium. This bill would allow FHA to increase the annual premium from the current .55% of the loan amount (divided by 12 and paid monthly) to a maximum of 1.5%. This nearly triples the amount they could collect, and if they put this in all at once, would be a major hardship for most borrowers. But it is more likely that they will tinker with the formula, lowering the Up-front premium and raising the annual, but not all the way to the limit. One combination that has been discussed, is lowering the Up-front MIP to 1% of the loan amount, and raising the annual to .90% (again, divided by 12). This approach gives a little on one side, while taking away on the other. An increase from the current .55% to .9% would result in about $30/mo on a $100,000 loan, while reducing the Up-front premium by $1,250. This may not be the intended result, but what this really does is make FHA more attractive for those who don’t plan on being in the property long term, and may make FHA a better alternative for some who would otherwise be able to finance with a conventional mortgage. I will have more analysis on this once we know how this will really shake out.

Nothing will happen until this bill passes through the Senate. No Senator has sponsored the bill yet, but based on the lopsided passage in the house, I have no doubt it will be coming soon. The higher payments will make it more expensive for some buyers, but this is a small price to pay to keep the FHA program on track. In order for the housing market to recover, FHA needs to stay healthy.

Peter Thompson 630-479-6424

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