Homebuyers seeking home mortgages from the Federal Housing Agency (FHA) will pay higher fees to help bolster FHA’s diminishing capital reserves. On Monday, the government agency announced it plans to raise upfront fees to replenish its capital base. It also wants to encourage private lenders to make more loans to borrowers in the residential mortgage sector.
With an expected increase of 75 basis points or 0.75 percentage points, on a 30-year fixed rate home mortgage, it raises the upfront premium to 1.75% or the mortgage amount.
The change goes into effect on April 1, 2012.
According to FHA's acting Commissioner Carol Galante, the increase will cost the average borrower about five dollars a month more on a $150,000 FHA mortgages. According to Galante, the average American applying for an FHA loan could afford these “marginal increases."
FHA Responds to 2011 Audit by Increasing Mortgage Costs
In late 2011, an independent consultant reported that FHA had only $2.6 billion in reserves -- down from $ 4.7 billion in 2010.
Furthermore, the auditor stated that the agency, which has a mortgage portfolio with a loan balance of $1.1 trillion, and is required to keep a 2% capital reserve, would need a bailout if the housing market continued its decline.
Over the past three years, the agency has paid out $37 billion in insurance claims made by lenders. The same lenders foreclosed on over four million homeowners who lost their homes.
This hike in upfront fees follows FHA’s increase for the basis points it charge on loans-- by 10 basis points, earlier this year. Borrowers of jumbo loan, mortgages of more than $625,500 increased 35 basis points.
Besides charging borrowers more for FHA loans, the agency will receive about $1 billion of the $26 billion mortgage settlement between the government negotiating team and the five largest mortgage servicers, over foreclosure irregularities.
FHA Importance to Home Ownership
The FHA residential mortgage program helps keep liquidity in the housing market. It has taken on a critical role since the housing market crashed. In 2006, FHA mortgages accounted for five percent of home mortgages.
Today, approximately 33% of all new mortgages in the housing market consist of FHA mortgages.
Borrowers can obtain in FHA loans for as low as 3.5% down payment at low interest rates. You can get an FHA loan low mortgage interest rate on one to four unit properties. The rules allow borrowers to roll closing costs and fees into the loan.
Home buyers who finance their homes through the FHA lending program can finance the additional cost into their monthly mortgage payment. However, some housing industry insiders, such as analyst Jared Sieberg of the Washington Research Group believe the higher fees will reduce home sales to first-time homebuyers.
This ultimately makes home mortgages more expensive. Sieberg says sellers and homebuilders will suffer.” Other analysts say lenders will not hold most of the home mortgage loans, but will continue selling them to Fannie and Freddie.