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MICA says FHA should immediately increase premiums to the limit

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Patrick Sinks, president and COO of Mortgage Guaranty Insurance Corp., will recommend to Congress Thursday that the Federal Housing Administration immediately increase premiums to the fullest, legally allowable limit. Sinks will speak on behalf of the Mortgage Insurance Companies of America to the House Financial Services Committee. MICA represents the private mortgage insurance industry. 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. FHA uses the MMIF to pay insurance claims on FHA-backed loans. "Although FHA has raised its premiums twice in the past year, the current health of the MMIF justifies an immediate increase in the premium," Sinks wrote in the testimony posted Wednesday. FHA maintains it doesn't need to raise premiums. FHA Acting Commissioner Carole Galante said in a recent conference call that 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. Sinks said MICA believes FHA should be required to keep premiums at the higher level until the agency's capital ratio rises back to 2% and for several years thereafter. 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. FHA is receiving criticism for what people say is the undercapitalization of the MMIF. Some, especially those in academia, say that the agency will need a multibillion-dollar bailout from the Treasury because of its continued underestimation of borrower default risk. The capital ratio, which is federally required to stay above 2%, fell from 0.5% in 2010 to 0.24% in 2011 primarily because of falling home prices, which put more borrowers underwater. The U.S. national home price index inched up 0.1% in the third quarter from the second quarter and dropped 3.9% from from a year earlier, according to the S&P Case-Shiller index released Tuesday. The national index decline is not as steep as the 5.8% decline posted in the second quarter, but home prices overall are back to first quarter of 2003 levels. In an October report to Congress, the FHA said it expects the ratio to rise above the minimum by Sept. 30, 2014, the agency's fiscal year-end. Sinks will also recommend FHA increase the minimum down payment from 3.5% to 5% and lower its loan limits to levels prior to the financial crisis. "The way FHA’s loan limits are calculated is designed to skew them so they are as high as possible," Sinks wrote. The committee will listen to testimony Thursday at 10 a.m Eastern from industry insiders and professors, including Andrew Caplin, economics professor at New York University, and Maurice "Moe" Veissi, 2012 president of the National Association of Realtors, on how to enhance FHA. Write to Justin T. Hilley. Follow him on Twitter @JustinHilley.

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