Changes to Mortgage Insurance Premiums
FHA will increase its annual mortgage insurance premium (MIP) for most new mortgages by 10 basis points or by 0.10 percent.
FHA will increase premiums on jumbo mortgages ($625,500 or larger) by 5 basis points or 0.05 percent, to the maximum authorized annual mortgage insurance premium.
These premium increases exclude certain streamline refinance transactions.
FHA will also require most FHA borrowers to continue paying annual premiums for the life of their mortgage loan.
Commencing in 2001, FHA cancelled required MIP on loans when the outstanding principal balance reached 78 percent of the original principal balance.
However, FHA remains responsible for insuring 100 percent of the outstanding loan balance throughout the entire life of the loan, a term which often extends far beyond the cessation of these MIP payments.
FHA’s Office of Risk Management and Regulatory Affairs estimates that the MMI Fund has foregone billions of dollars in premium revenue on mortgages endorsed from 2010 through 2012 because of this automatic cancellation policy.
Therefore, FHA will once again collect premiums based upon the unpaid principal balance for the entire period for which FHA is entitled.
This will permit FHA to retain significant revenue that is currently being forfeited prematurely.
Revised Premium Cancellation Policy
Under a policy change made in 2001, FHA has been cancelling required mortgage insurance premiums (MIPs) on loans for which the outstanding principal balance reaches less than 78% of the original principal balance.
However, FHA remains responsible for insuring 100% of the unpaid principal balance of a loan for the entire life of the loan, such loan life often extending far beyond the cessation of MIP payments.
As written, the timing of MIP cancellation is directly tied to the contract mortgage rate, not to the actual loan LTV.
The current policy was put in place at a time when it was assumed that home price values would not decline, but today we know that LTV measured by appraised value in a declining market can mean that actual LTVs are far lower than amortized mortgage LTV, resulting in higher losses for FHA on defaulted loans. Analyses conducted by FHA's Office of Risk Management projects lost revenue of approximately $10 billion in the 2010-2012 vintages as a result of the current cancellation policy.
The same analyses also suggest that 10%-12% of all claims losses will occur after MIP cancellation.
Therefore, beginning with new loans endorsed after the policy change becomes effective later in FY 2013, FHA plans to once again collect premiums based upon the unpaid principal balance of FHA loans for the entire period during which they are insured, permitting FHA to retain significant revenue that is currently being forfeited prematurely.
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