FHA raises mortgage insurance, for life of loan

Federal Housing Administration Commissioner Carol Galante announced a series of changes to be issued this week that will allow the agency to better manage risk and further strengthen the health of the Mutual Mortgage Insurance Fund. 

FHA will increase its annual mortgage insurance premium for most new mortgages by 10 basis points, or 0.10%. Premiums on jumbo mortgages — $625,000 or larger — will also increase by 5 basis points, or 0.5%, to maximum authorized annual mortgage insurance premium. These increases exclude certain streamline refinance transactions. 

The FHA will also require most borrowers to continue paying annual premiums for the life of their mortgage loan.

In 2001, the FHA cancelled required MIP on loans when the outstanding principal balance reached 78% of the original principal balance. However, FHA will remain responsible for insuring 100% of the outstanding loan balance throughout the entire life of the loan, a term which often extends beyond the cessation of these MIP payments. 

The MMI Fund has foregone billions of dollars in premium revenue on mortgages endorsed from 2010 through 2012 because of this automatic cancellation policy, the FHA’s Office of Risk Management and Regulatory Affairs said.

Thus, the FHA will collect premiums based upon the unpaid principal balance for the entire period for which FHA is entitled, permitting FHA to retain significant revenue that is currently being forfeited prematurely. 

“These are essential and appropriate measures to manage and protect FHA’s single-family insurance programs” said Galante.  

She added, “In addition to protecting the MMI Fund, these changes will encourage the return of private capital to the housing market, and make sure FHA remains a vital source of affordable and sustainable mortgage financing for future generations of American homebuyers.”

The series of changes will also include home equity conversion mortgage consolidation, requiring manual underwriting on loans with decision credit scores below 620 and DTI ratios over 43%, raising down payments on loans above $625,000, access to FHA after foreclosure and continuing efforts to improve risk management. 

The FHA will also step up its efforts for approved lenders with regard to aggressive marketing to borrowers with previous foreclosures, while also reminding lenders of their duty to fully underwrite loan applications. All new loans must meet FHA guidelines. 

Through a Federal Register Notice, the FHA will announce a proposal to increase down payment requirements for mortgages that have original principal balances above $625,000. The minimum down payment requirement for these mortgages will increase from 3.5% to 5%. 

Additionally, the FHA will require lenders to manually underwrite loans of which borrowers have a credit score below 620 as well as a total debt-to-income ratio greater than 43%. Thus, lenders will be required to document compensating factors supporting underwriting decisions to approve loans where parameters are exceeded.

All of these changes will further contribute to the efforts made throughout the Obama Administration’s tenure to improve risk management at the FHA as well as protect the MMI Fund, Galante suggested.

As a result of these commitments, the changes made during the past four years have added more than $20 billion in value to the MMI Fund, the FHA said Wednesday. 

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