The Bush administration proposes to implement "risk-based" pricing of premiums paid by borrowers with government-backed loans beginning July 14 — the same day guidelines for FHA loan guarantee programs are to be expanded to serve more delinquent borrowers.

The more flexible pricing structure, which would also allow FHA to reduce mortgage insurance premiums for some borrowers with good credit, is intended to enable the government to serve more troubled borrowers while protecting taxpayers from losses, HUD officials said. The proposed change in pricing will be published in the Federal Register for public comment on May 13.

Under the current pricing structure, all borrowers regardless of their credit standing pay 1.5 percent of loan balance up front and 0.5 percent a year. Under risk-based pricing, the upfront premium will range from 1.25 percent to 2.25 percent.

On a $150,000 mortgage, the difference between the existing 1.5 percent upfront premium and the 2.25 percent premium is about $7 per month, HUD says.

Risk-based pricing has been a controversial aspect of so-called "FHA modernization" legislation, with some opponents worried that borrowers who can least afford the fees will be overcharged. A sweeping housing bill approved by the House on Thursday would require FHA to refund extra premiums charged to higher-risk borrowers if they do not default on their loans.

The Bush administration says it needs to implement risk-based pricing to ensure that claims filed by lenders when FHA loans go bad are covered by premiums collected from borrowers, and not paid by taxpayers.

"By charging different premiums, FHA will operate like most other insurance companies," HUD said in a statement. "This premium structure will preserve lower premium costs for FHA’s traditional borrowers, including low-income and minority families who have a strong credit history and save for a down payment."

Claims against FHA’s insurance fund are expected to rise, in part because FHA loan limits have been increased to as much as $729,500 in high-cost markets, and also because of a new program aimed at helping troubled borrowers refinance into more affordable loans.

The new FHASecure program, rolled out by the Bush administration in August, was originally designed to help borrowers who had fallen behind on payments on adjustable-rate mortgage (ARM) loans after an interest-rate reset.

On April 9, the administration said it would expand the FHASecure program by creating two new categories of eligible borrowers:


  • Borrowers with adjustable-rate mortgage (ARM) loans who were late on two consecutive monthly mortgage payments or at two different times over the previous 12 months. FHA will require a 97 percent loan-to-value (LTV) ratio for these borrowers to refinance into a government-backed loan — which in many cases would require lenders to write down some principal.



  • Borrowers with ARM loans who were late on three consecutive monthly mortgage payments or at three different times over the past 12 months. FHA will require a 90 percent LTV ratio for these borrowers to refinance.


HUD said the expanded FHASecure guidelines are set to be implemented on July 14 in conjunction with risk-based premium pricing.

HUD estimates that FHASecure has helped 150,000 borrowers refinance since the program was launched and that the expanded guidelines will help as many as 500,000 homeowners take advantage of the program by the end of the year. FHASecure accounted for $28.5 billion of the $68 billion in loans FHA has helped facilitate since September, HUD says.

Democrats are pushing for an even bigger, $300 billion expansion of FHA loan guarantee programs to enable up to 2 million FHA-backed refinance loans in cases where lenders agree to accept no more than 85 percent of a property’s current appraised value. That plan, which is opposed by the Bush administration, is part of the housing bill HR 3121 approved by the House Thursday (see story).


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