David Saks: FHA To Require Mortgage Insurance Premium For the Life of the Loan

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FHA To Require Mortgage Insurance Premium For the Life of the Loan

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.   

Money House

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.


source: HUD

David Saks

Time&Temp Memphis

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Comment balloon 8 commentsDavid Saks • January 30 2013 07:47PM


That's a lot to explain to a first time home buyer...not so good.

Posted by Tina Maraj, Celebrating 30 Years of Real Estate Sales (RE/MAX One) over 7 years ago

FHA put their foot down hard enough to go through the floor and decided it was time to indemnify, Tina.

After 12 years of unmitigated losses, in the billions of dollars, I understand why they've made the decision to mandate the mortgage insurance premium for the life of the loan.

I hope it lowers default rates.

It'll make it tougher now that the premium isn't cancelled at the 78% level of the principal balance any longer.

Posted by David Saks ((retired)) over 7 years ago

David -- thanks for getting this news out.  They had to do something, but these actions will probably encourage more purchasers to move toward conventional financing, with a bit lower insurance bite.

Posted by Steven Cook (No Longer Processing Mortgages.) over 7 years ago

Confidence in MBS pools will strengthen, Steven, with more default prevention in place. Subsequently, there should be more capital strength allowing mortgage originators to refill their glasses.

Posted by David Saks ((retired)) over 7 years ago
David I read about this earlier and I have mixed emotions. I think more buyers will opt for a 5% conventional loan.
Posted by Lanise Warrior-Johnson, Real Estate Specialist (Real Estate Brokers Services, Inc.) over 7 years ago

The MIP or PMI could still be required, Lanise.

Mortgage insurance is required when certain criteria are not met or when certain loan products are originated, even with other lending options.

Other lenders might still retain the 78% principal cap on PMI mandates.

Posted by David Saks ((retired)) over 7 years ago

Even more motivation to come up with down payment that will put you into a loan where no PMI is required in the first place. There should be fewer and fewer loads without down payment I would think due to this new ruling for FHA loans!

Posted by Les & Sarah Oswald, Broker, Realtor and Investor (Realty One Group) over 7 years ago

FHA downpayment requirements are low by conventional standards, Sarah & Les.

It'll stifle defaults.

Is it possible that FHA PMI premiums could actually be offset by the low downpayment requirement over the life of the loan for FHA as opposed to the required downpayment over the life of a conventional loan without PMI ?

I wonder....

Who can do the math ?

Posted by David Saks ((retired)) over 7 years ago

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