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FHA Lowers Mortgage Insurance Premiums for Home Refinance

FHA Will Lower Mortgage Insurance Premiums for Home Refinanc
Homeowners wait to register at the Neighborhood Assistance Corporation of America (NACA) Save the Dream event in Los Angeles, on Feb. 16, 2012. Photographer: Patrick Fallon/Bloomberg

The Federal Housing Administration will lower mortgage insurance premiums for borrowers who refinance their loans as part of President Barack Obama’s plan to improve the housing market.

The FHA will reduce up-front premiums to 0.01 percent of total loan amount from 1 percent under the plan announced by Obama today during a news conference at the White House. Annual fees will be cut to 0.55 percent from 1.15 percent for borrowers with FHA loans made before June 1, 2009, according to a fact sheet distributed by the Obama administration.

“I’m not one of those people who thinks we should just sit by and wait for the housing market to hit bottom,” Obama said at the news conference. “There are real things we can do right now,” he said, noting that the changes don’t require congressional approval.

The fee cuts, which take effect April 9, are part of an Obama administration effort to spur the economy by helping homeowners take advantage of historically low mortgage interest rates. The changes could increase the reach of FHA’s streamlined refinance program by 3.4 million households paying interest rates higher than 5 percent, the agency said. A typical borrower would save about $1,000 a year in premiums and $3,000 a year including savings from lower rates, the FHA said.

The streamlined refinance program is available to borrowers with FHA-insured loans who are current on their payments even if they owe more than their homes are worth. The program doesn’t require verification of income and employment, and it doesn’t mandate a new appraisal of the property.

Mortgage Insurers

Private mortgage insurers, which compete against the FHA providing coverage on loans when borrowers make down payments of less than 20 percent, declined in New York trading. Philadelphia-based Radian Group Inc. slipped 5.7 percent to $3.46 at 4:01 p.m. Genworth Financial Inc., based in Richmond, Virginia, dropped 3.9 percent.

Lower fees for FHA refinancings won’t have an effect on private mortgage insurers, said Matthew Howlett, analyst at Macquarie Group Ltd., which has served as an adviser to Radian.

More likely is the higher premiums for new FHA borrowers will help private insurers gain market share, Howlett said.

“They don’t care if FHA is easing their criteria for seasoned, pre-2009 borrowers,” he said in an interview today. “What they’re concentrated on is new borrowers.”

The plan for FHA rate cuts to spur refinancing follows the agency’s announcement last month that it is raising premiums on new loans to replenish a reserve fund depleted by defaults in the wake of the 2008 credit crisis.

FHA Audit

An audit released in November revealed that FHA reserves had fallen to a record $2.6 billion. The agency’s capital ratio, a measure of the its ability to withstand losses, was 0.24 percent in the year ended Sept. 30, the third straight year it failed to meet the legal minimum of 2 percent.

Starting April 1, the up-front premium for new 30-year mortgages will cost 1.75 percent of the loan amount, up from 1 percent. Those increases don’t apply to the streamlined refinance program.

Annual premiums on larger loans between $625,500 and $729,750 will rise by 35 basis points, or 0.35 percentage point, a move announced as part of the FHA budget. Annual premiums on loans up to $625,500 will rise by 10 basis points.

The reduced fees for streamlined refinancing will cost the FHA “hundreds of millions of dollars” over the next few years, though it won’t have a significant impact on the insurance fund, Housing and Urban Development Secretary Shaun Donovan said during a conference call with reporters today.

“It’s a relatively small amount,” he said. “We think that on net this can have close to no impact on the fund.”

Obama also announced an agreement with mortgage servicers to provide compensation for members of the military who faced wrongful foreclosure and refunds for those who were improperly denied refinancing, according to the fact sheet.

Servicers will review of every foreclosure of a military member’s property and will pay those whose homes were wrongly repossessed the lost equity plus interest and $116,785.

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