On April 18, 2011 the mortgage insurance premiums (MIP) were increased on all Federal Housing Administration mortgages. The old monthly premium was .55 percent. The new premium is 1.1 percent, or double the older ratio. This change means an increase in premiums for those looking for purchase money loans, plus existing FHA mortgage holders interested in refinancing. The increase affects FHA-to-FHA refinances.
If the president is serious about encouraging refinances of government-backed FHA mortgages, then the rules need to be relaxed on refinances. The rule now means that individuals who have an FHA mortgage that pre-dates the MIP increase are subject to the much higher MIP if they want to refinance. The 100-percent increase negates most of the savings on refinances.
From 2006 to 2010, there were approximately 3,200,000 FHA mortgage loans taken out (excluding reverse mortgages). All these mortgage holders would be subject to the higher MIP if they refinanced today.
On a 300,000 mortgage, the older monthly mortgage insurance premium on a 95-percent FHA loan would increase by $140 a month. Unless the customer is coming down from a very high mortgage interest rate, the higher MIP would all but wipe out the savings of the lower rate.
The government should grandfather the older MIP formula for customers who have been paying on time with their older FHA loans. The rules need to be modified for these folks.
The rational for the premium increase was to bolster the reserves used for FHA mortgages that result in default. The default rate for FHA mortgages has been in the eight- to nine-percent range for the last few years. The percentages of defaults have lessened some because of the higher quality of originations, due to vigorous underwriting standards.
This rule fix should be a priority for the president and Congress when they tackle economic issues this year. It is a simple fix that would help tens of millions of homeowners who hold government-sponsored FHA mortgages.
If 40 percent of the mortgage holders from 2006 to 2010 refinanced and the average savings was $250 a month, this would amount to a “stimulus” to the tune of just under $500,000.00 with little cost to the government.
Bill Starrels lives in Georgetown and is a mortgage loan officer specializing in refinances and purchase mortgages. He can be reached at 703-625-7355 or firstname.lastname@example.org