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HUD considers FHA mortgage premium increase

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The Department of Housing and Urban Development is considering increasing premiums on Federal Housing Administration-insured mortgage loans. The revelation comes after weeks of FHA official denials. HUD Secretary Shaun Donovan testified Thursday to the House Financial Services Committee that as a result of an October analysis by an independent actuary of FHA's insurance fund, HUD is not only having discussions with Congress about whether additional premiums are necessary, but that it plans to announce how it will address premium prices in its fiscal year 2013 budget proposal. The proposal will be published in February 2012. "FHA is constantly evaluating the appropriate level of premiums given the potential risks to the mutual mortgage insurance fund, and any action regarding premiums will be considered in the context of balancing access to credit in today’s economic environment with the need for added revenue generation to protect the fund," Donovan said in a written testimony released immediately before the Congressional hearing. Increases in premiums over the last two years resulted in a $1.37 billion increase in the economic value of the fund, according to FHA. The value's the fund is currently $2.55 billion. FHA expects its 2012 book of business to add $9 billion to the fund and its capital ratio, which stands at .24%, to cross the federally required minimum by Sep. 30, 2014, FHA's fiscal year-end. The ratio is a measure of the fund's soundness and compares the fund's capital resources to the dollar amount of mortgages that FHA insures. Current annual premiums are set at either 1.1% or 1.15% depending on the initial down payment by the borrower. FHA has the authority to raise these fees to 1.5% and 1.55%, which would improve the finances of the FHA's mutual mortgage insurance fund over time, he said in a written testimony, but cost borrowers more. FHA's expectations are based on the actuary's analysis that low-risk  new loan business and a 1.2% increase in 2012 home prices. However, the skeptics remain. Patrick Sinks, president and COO of Mortgage Guaranty Insurance Corp., recommended to the committee Thursday that FHA immediately increase premiums to the fullest, legally allowable limit. Sinks spoke on behalf of the Mortgage Insurance Companies of America. MICA represents the private mortgage insurance industry. FHA experienced substantial losses of more than $26 billion from 2000 to 2008 from insurance payouts to borrowers. Donovan said half of the high-risk loans insured at the peak of housing bubble will ultimately result in payouts, with one out of four loans in 2007 resulting in insurance claims. Losses of close to $10 billion will come from FHA's 2008 book of business, he said. "That's why we continue to pursue additional reforms," Donovan told the committee. But FHA Acting Commissioner Carole Galante said in a recent conference call that it is highly unlikely the agency will need a bailout, and said the agency has levers such as another premium boost to pull before they would have to resort to government assistance. "Right now there is no reason for us to activate those conversations," Galante said, adding that it would take "very significant" declines in home prices in 2012 to create a situation where FHA would need additional support. In addition to premium increases, HUD is assessing further loss mitigation strategies by potentially changing its partial payment of claim process as well as ensuring that the streamline refinance tool is being used as widely as appropriate. Write to Justin T. Hilley. Follow him on Twitter @JustinHilley.

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