At the end of January, the U.S. Department of Housing and Urban Development (HUD), announced plans to increase the rate of mortgage insurance premiums and the length of time they are to remain in place. These changes are taking place this year and could increase the cost of an FHA mortgage by more than $50,000 over the life of the loan.
The purpose of the increase is to strengthen the Mutual Mortgage Insurance Fund. This fund is managed by the FHA and pays the lender if the homeowner defaults on his loan. The Mutual Mortgage Insurance Fund took a beating in the housing crisis. A recent actuarial study of the fund shows that the value of the fund at the end of 2012 is more than $13 billion in the red. This is a $14 billion drop from the previous year. The value is based on estimates of future cash flows and may stay negative for up to six years. It was also estimated that there was a 5% chance that the Fund’s capital resources could turn negative in the next seven years.
The rate increase is not the most expensive part of the program. In most cases the rate increase is only 10 basis points. The rate increase is effective on April 1, 2013. No, this is not an April Fool’s Joke! The rate increase is exempted for streamline refinances on loans that were endorsed on or before May 31, 2009.
The big story in this program is the length of time the Mortgage Insurance Premiums are paid. Buyers who put less than 10% down will pay the Mortgage Insurance Premium for the entire life of the loan. If you purchased a $200,000 home after June 3rd with 3.5% down and get a 30 year fixed FHA mortgage; your increased Mortgage Insurance Premium over the life of the loan is $51,242 for a total of $78,165 in paid premiums. The change in duration goes into effect on June 3, 2013.
Due to the increased costs, home affordability will also be affected. A buyer who could afford to buy a $200,000 home today will only be able to afford a $196,000 home after the changes. This is a decrease in affordability by 1.75%.
Do we really need less home affordability now?
Shawn Kaplan, local mortgage expert said, “In a time that we need to be finding ways to stimulate the Real Estate Industry, a number of the proposed changes above will only accomplish slowing it down further.” Shawn continued, “What we need for FHA and Washington is to seek is real solutions from those in the Lending Industry that have first hand experience with what is wrong, and know what is needed to fix it.”
Another likely consequence of this change is the move away from US Government insured loans. The market share of federal government insured mortgages skyrocketed from 5.8% in 2005 to more than 30% last year. The ratio of government insured loans is out of balance, and needs to trend in the opposite direction.
If you plan to buy with an FHA mortgage this year, I suggest that you do it now. If you do not meet the June 3rd deadline, there are a few low down payment conventional loan products available. The conventional down payment may be slightly higher, but you will save a ton of money in the overall cost of the loan.
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