While the mass media and the general public seem to focus on the fact that the reserves of the Federal Housing Administration (FHA) may fall below the mandated amount in 2013 (due to FHA loans defaulting), I have yet to hear a voice that speaks for the new FHA borrowers—the innocent homebuyers who will be the ones forced to pay for it! New borrowers’ monthly housing expense will increase due to another expected increase in FHA mortgage insurance (MI) premiums!
You will notice that in this article, I will be departing from my usual more “matter of fact” style, and you will also notice a thread of sarcasm because I cannot believe the FHA does not see how their changes will negatively impact the exact people they were established to help: The hard-working American wage earner. For any officials of the U.S. Department of Housing & Urban Development (HUD) that may be reading this please forgive me for pointing out the incongruity, but we have to get the focus back on the low- to middle-income American workers.
The HUD budget for fiscal year 2013 states that:
“This Budget includes the recently enacted increases in FHA premium levels (April 2011). These increases (in premiums) will boost FHA’s capital reserves—to better protect taxpayers against the risk of credit losses by the program— and, as a result, increase federal revenues.”
In a Feb. 13 issue of Bloomberg Businessweek appears an article wherein acting Housing Commissioner Carol Galante is quoted regarding the FHA’s loan guarantee request from the treasury. She justifies the premium increase, in order to keep up the FHA reserves, saying:
“It's (the mortgage insurance premiums) more than enough to compensate for the negative estimate for the draw on Treasury. The Agency also plans to announce another premium increase in the coming days.”
Let’s follow the logic (a term I use very loosely here) of the government in this regard:
“With the great losses we have incurred because of the high rate of foreclosures due to people not being able to afford their payments, we are going to recover our losses by increasing new borrowers’ house payments by raising the mortgage insurance premiums.”
Let’s see if we’ve got this right ... people cannot afford their mortgages and hence are foreclosing. As a result, the FHA reserves have plummeted. So FHA will hike their premiums to make it even more difficult for people to afford their payments! Brilliant!
Here are some more direct quotes from the 2013 HUD budget:
“Giving Hard-Working, Responsible Americans a Fair Shot ...
There is more work to do to ensure that more Americans have the opportunity to enter the middle class, and that the economic security of middle-class Americans does not continue to erode.”
That brilliant government logic at work once again: We need to help more Americans enter the middle class, and keep the existing middle class from further erosion. Thus, we’ll increase the house payments through MI premiums, assuring that those hard-working Americans we’re claiming to help cannot buy a home or stay in one. Again, sheer brilliance.
Now a quote from HUD’s Mission Statement:
“HUD’s mission is to create strong, sustainable, inclusive communities and quality affordable homes for all.”
And the way they will fulfill that mission is to make such a reality more impossible by increasing the cost of being a homeowner through MI premiums and make homes less affordable for all FHA homebuyers. But wait, it gets better: In FHA’s move to make homes affordable, they plan to reduce the amount a seller can contribute toward buyer closing costs from six percent to three percent of the purchase price. I think these folks left their thinking caps at home.
Another quote from the budget:
“The economy lacks a vibrant housing sector—and a balanced housing policy—that enables families to rent or own a high-quality, affordable home ...”
And from HUD’s Mission Statement:
“HUD is working to strengthen the housing market to bolster the economy ...”
Here are some historical facts about MI premiums for the standard 30-year fixed loan with less than a five percent downpayment which accounts for nearly all of FHA’s loans:
►July 2008: Housing and Economic Recovery Act in 2008, authorizes FHA to increase Upfront Premiums to three percent.
►April 2010: Upfront Premium increased from 1.5 percent to 2.25 percent.
►April 2011: The Annual Premium increased from 0.90 percent to 1.15 percent.
►October 2010: The Annual Premium increased from 0.55 percent to 90 percent.
►October 2010: The Upfront Premium is decreased from 2.25 percent to one percent.
What we see from these facts are increases in the Annual Premium of over a 100 percent, which increases a house payment significantly. In addition, we see a decrease in the Upfront Premium of over 100 percent, which increases the mortgage amount because it’s financed, but only slightly affects the house payment. What this means to a homeowner is that with a $150,000 loan amount the monthly insurance has increased from $69 to $144; a $75 increase. Now this may not seem like a lot for a family with a higher net disposable income, but for many families, $75 is significant, and it also decreases the purchase price they can afford.
Now let’s look at these changes from another perspective and we will see how many new borrowers are being taxed and essentially bearing the whole burden of helping the FHA recover. Prior to the October premium changes, using rounded figures, and staying with the $150,000 example, a homebuyer would pay $3,400 in the Upfront Premium and assuming they kept that loan for 10 years, another $8,000 for a total of $11,400. With the current premium amounts, the Upfront Premium would be $1,500 and 10 years of payments would be $17,000 for a total of $18,500. So in this example, the homebuyer today is paying the FHA $7,000 more than before.
While I understand that FHA is legislated to be a self-sustaining agency, it seems grossly unfair to make the new homebuyers bear the burden of the housing crash. I think it is time for the FHA to look for new ways to cut costs and streamline their operational costs in order to get back to their commitment to helping the hard-working American in earnest.
Jeff Mifsud is founder of Michigan-based Mortgage Seminars LLC, a former FHA underwriter with 15-plus years of experience originating FHA loans, an FHA expert for LoanToolbox.com and creator of The FHA Originator, a monthly FHA newsletter. Jeff may be reached by phone at (248) 403-8181.