If Congress goes along, the Obama administration proposes to slash upfront premiums on FHA mortgage insurance to 1 percent, down from 1.75 percent today, but would offset that reduction with a 70 percent increase in annual premiums.

With FHA’s capital reserve ratio falling below the 2 percent minimum set by Congress, the Department of Housing and Urban Development (HUD) last month announced several steps to cut the mortgage insurance program’s losses and raise revenue.

Annual premiums are already at their statutory limit — 0.5 percent for borrowers with loan-to-value (LTV) ratios of up to 95 percent, and 0.55 percent for higher LTVs. But HUD has the authority to raise upfront premiums all the way to 3 percent without seeking permission from lawmakers.

HUD announced last month that it planned to hike upfront premiums for FHA borrowers to 2.25 percent for loans assigned case numbers on or after April 5.

In addition, HUD said it would reduce allowable seller concessions from 6 percent to 3 percent early this summer, and require borrowers with credit scores below 580 to make downpayments of at least 10 percent.

When announcing the plan to increase upfront premiums in January, FHA Commissioner David Stevens said some of the increase might be shifted back to annual premium payments, if Congress provided that flexibility (see story).

In releasing details of its proposed 2011 budget Monday, the Obama administration revealed more concrete details of how that trade-off would work.

If Congress passes legislation giving HUD the flexibility to raise FHA annual premiums, it will lower upfront premiums to 1 percent, and increase annual premiums to 0.85 percent for borrowers with LTVs of up to 95 percent and to 0.9 percent for borrowers with higher LTVs.

That would represent a 70 percent increase in annual premiums for borrowers with LTVs up to 95 percent, and a 64 percent increase in annual premiums for borrowers with higher LTVs.

If upfront premiums are increased to 2.25 percent in April, a borrower taking out a $200,000 loan with the 3.5 percent minimum downpayment would pay an upfront premium of about $4,500, plus $1,100 a year in annual premiums.

But if Congress allows HUD to increase annual premiums and HUD rolls back upfront premiums to 1 percent, the same borrower would pay an upfront premium of about $2,000, plus $1,800 a year in annual premiums. The $700 increase in annual premiums would amount to about $58 a month. …CONTINUED

Dan Green, a Cincinnati-based loan officer for Waterstone Mortgage Corp., is advising borrowers to plan for the upfront premium to go up to 2.25 percent on April 5, as planned.

"Just because the FHA asks for control over its own mortgage insurance doesn’t mean that Congress will grant it," Green said on his blog, The Mortgage Reports. "Nor does it mean that the FHA won’t deviate from its original plan should Congress accede to the FHA’s request."

From a borrower’s standpoint, the bottom line is that the cost of FHA mortgage insurance is going up, whether it’s the upfront or annual premium that increases, Green told Inman News.

A reduction in the upfront premium that’s offset by an increase in annual premiums doesn’t necessarily reduce the cash needed to close, because the upfront premium can be added to the loan balance, Green said.

From FHA’s standpoint, rolling the upfront premium into the loan reduced the borrower’s equity.

"They’d rather that people preserve their equity, and make the higher monthly payment," Green said. "If you have 3.5 percent equity (through a minimum downpayment), they would rather not see 2.5 percent eroded immediately."

In its proposed budget, the Obama administration also said it plans to add an annual fee to mortgage loans guaranteed by the U.S. Department of Agriculture’s Rural Housing Service (RHS).

The upfront fee on new RHS purchase loans will remain 2 percent, but an annual fee of 0.15 percent will be added to both new and refinanced loans, the administration said. The upfront fee for refinanced loan guarantees will be increased to 1 percent.

In addition, the Obama administration plans to make the RHS guaranteed loan program a direct endorsement program similar to FHA and the Department of Veterans Affairs’ VA loan guarantee program.

The administration expects RHS will provide $12 billion in single-family loan guarantees in 2011, compared with the $68 billion in guarantees provided by VA and $360 billion in FHA loan volume in 2009.


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