The Federal Housing Agency (FHA) originally presented FHA Emergency Fiscal Solvency Act of 2012 to Congress in March 2012. The House passed the measure in late 2012. Beginning in June, the FHA starts enforcing the component of its plan designed to restore the agency to fiscal solvency.
Borrowers who fall below the requisite 20% down payment or equity requirement must pay insurance premium for the entire term of the loan, which may be as long as 30 years.
FHA’s Fiscal Standing
Currently, the Federal Housing Administration (FHA) guarantees about $1.1 trillion in loans. In a report to Congress, the FHA states it has $30.4 billion in reserves and predicts it will suffer about $46.7 billion in losses on the loan in its portfolio. The agency expects to have a $16.3 billion deficit.
In the last fiscal budget presented for FHA, it anticipates a need for funds to cover $943 million in losses primarily associated with its reverse mortgage program.
The reverse mortgage program allows older Americans who own their homes to obtain mortgages to pay for their retirement lifestyle. The loan is paid off when the borrower moves out of the home for 12 consecutive months, sell the home or dies.
The FHA has a Congressional mandate to maintain its capital reserve ratio above 2.0 percent. If the reserve falls below the 2% benchmark, absent raising funds through its fees, the agency could require a taxpayer bailout.
Mortgage Insurance Requirement
Usually, FHA lenders require home buyers to purchase mortgage insurance when they put down less than 20% of a home’s purchase price. Homeowners refinancing a mortgage, but have less than 20% home equity, must also buy mortgage insurance.
Previously, borrowers only paid FHA mortgage the insurance premium until they reached 22% equity, based on home value. After accumulating the necessary equity, the FHA allowed them to drop the coverage.
At current rates, borrowers who can afford a 20% down payment will pay around 3.4% for a 30-year, fixed rate mortgage. However, borrowers who obtain a FHA-insured home mortgage with a five percent down payment would receive a mortgage interest rate of around 4.7% for the same product.
Prior to the new regulation, borrowers could cancel the mortgage insurance policy after 7 years.
According to the agency’s calculations, making the fees permanent for loans made over just the last three years will bring $10 billion into its coffers.
Last year, the FHA made it more attractive for homeowners with FHA mortgage to refinance their home loans, last year the FHA reduced the Upfront Mortgage Insurance Premium for borrowers 1.75 percent of the mortgage amount 0.01 percent.
Before the revision, a borrower with a $250,000 mortgage would pay $4,375 compared to $25. It also reduced the amount of monthly premium built into the monthly payments.
In addition, FHA is exempted from the rules that require private mortgage insurers to cancel mortgage insurance policies when borrowers reach 20% equity in their homes.
Responses to FHA Policy Change
Many housing advocates believe that the improvement in the housing market is also mimicked in the FHA real estate portfolio. Therefore, the agency has much improved finances and should not need to raise fees for insurance premiums. However, the agency insures the riskiest borrowers.
Others say that the FHA should do what it needs to prevent coming to Congress for a taxpayer bailout. Many experts question whether the agency requires a bailout plan. Nonetheless, the scheme will lock middle class borrowers who depend on the programs into paying high fees for the duration of the FHA-insured loan. It is expected to generate about $10 billion.
About FHA Mortgages
Since 1934, the Federal Housing Administration has made it financially possible for millions of moderate income Americans to become homeowners. Borrowers can receive loans for single-family homes, townhouses, FHA-approved condominiums and buildings up to four units.
The government agency insures the loans, which protect mortgage lenders from sustaining loss if a borrower defaults.
- Low down payment of 3 to 5%
- Low closing costs
- Lower credit score to qualify for loan
FHA’s loan guarantee gives lenders flexibility and enables them to make the loans available to the broadest number of borrowers. Borrowers can also apply for a single home loan to purchase and renovate a home under the FHA’s 203 k mortgage program.