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By George Brooks

FHA Announces New Premium Hikes to Stabilize MMI Fund

February 29, 2012

The FHA this week announced annual and upfront increases in mortgage insurance premiums for all forward mortgages, including jumbos, in an effort to bolster capital reserves and allay Congress’ fear of a taxpayer bailout.

According to the FHA, the upfront mortgage insurance premium (MIP) will be increased from the current 1 percent to 1.75 percent of the base loan amount while the annual insurance premium will go up by 0.10 percent for all FHA-insured single-family home loans under $625,500, effective April 1.

The 0.75 percent increase applies regardless of the amortization term or loan-to-value ratio of the FHA-insured mortgage loan, the agency said. The FHA said it will continue to allow financing of this charge into the mortgage.

The FHA is also exercising its statutory authority to raise the annual premium by 0.35 percent for loan amounts exceeding $625,500 up to $729,750. This change is effective for case numbers on or after June 1.

The FHA estimates that the upfront premium hike will increase FHA borrowers’ monthly mortgage payments by an average of approximately $5. However, the payments may actually rise by almost $25.

For example, a borrower with a 3.5 percent downpayment on a $193,000 30-year, fixed-rate home loan may end up paying $1,319.01 a month with the new higher premium, compared to the previous $1,294.56.

The premium increase is expected to generate more than $1 billion in additional receipts to the FHA Mutual Mortgage Insurance Fund in FY 2012 and FY 2013, “beyond the receipts anticipated in the president’s proposed budget,” said Galante in testimony this week before the House Financial Services Subcommittee on Insurance, Housing and Economic Opportunity. The changes, she said, would have minimal effect on homeowners.

The Department of Housing and Urban Development plans to use the revenue raised from the single-family premium increases in combination with monies received as part of recent settlement agreements with servicers and lenders to strengthen the MMI Fund.

Last November, the annual independent actuarial study of the FHA indicated that the MMI Fund’s capital ratios had slipped further below the congressionally mandated 2.0 percent threshold to 0.24 percent from 0.50 percent in FY 2010. The FHA had dipped three times into its reserves to cover mounting losses from the 2006 through mid-year 2009 books of business.

“After careful analysis of the market and the health of the MMI Fund, we have determined that it is appropriate to increase mortgage insurance premiums in order to help protect our capital reserves and to continue encouraging the return of private capital to the housing market,” said Galante. “These modest increases are one of several measures we are taking towards meeting [Congress’] mandated two percent reserve threshold, while allowing FHA to remain a valuable option for low-to-moderate income borrowers.”

Additional details will be published in a forthcoming mortgagee letter, according to a HUD spokesman. Borrowers already in an FHA-insured mortgage, Home Equity Conversion Mortgage and certain special loan programs will not be affected by the latest pricing changes, the department said.

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