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Federal Housing Administration (FHA) said it will hike mortgage insurance premium (MIP) again. Its also setting in place regulation that will prevent all new borrowers to cancel their mortgage insurance premium even if the loan-to-value requirement is met during the life of the loan. This was announced in the FHA press release issued on November 12, 2012.
FHA mentioned that over the past year it has been critical to housing recovery by insuring 1.2 million single family mortgages, with 78% loans to first time home buyers. FHA accounted for 50 percent of home purchase to African American borrowers and 49 percent to Hispanic/Latino borrowers underlining its importance for minority home buyers. At the same time losses on loans insured between 2007 and 2009 continued to strain FHA funds with $70 billion of additional claims from residential mortgage servicers. FHA does not fund loans but simply insures the lenders in case of losses due to defaults resulting in short sale or foreclosures. FHA keeps reserves to meet the requirement of these claims. The law required reserves to be 2% of its total portfolio which it breached 3 years ago. The independent actuarial study now estimates that the FHA has exhausted all its reserves and it fell below zero to -1.44%.
FHA Acting Commissioner Carol Galante said, “While the loans made during this Administration remain the strongest in the agency’s history, we take the findings of the independent actuary very seriously. We will continue to take aggressive steps to protect FHA financial health while ensuring that FHA continues to perform its historic role of providing access to home ownership for underserved communities and supporting the housing market during tough economic times.
Some of the steps FHA is taking in 2013 are:
Increasing FHA mortgage insurance premium – by 10 basis points or 0.1 percent. So if you are taking a loan of $400,000, the hike increases your payment by $400 per year.
Cancel required mortgage insurance premium payments after a certain period – Currently FHA allows cancellation of mortgage insurance premium once the loan balance reaches 78% of the home value. On a 30 year fixed loan, a minimum payment of 5 years is required while on 15 year fixed there is no such requirement. Understand that FHA 100 percent insurance guarantee remains in effect for the full 30-year life of a loan. FHA has been left without premiums to cover losses on loans held beyond the period for which it collects premiums. This change will apply to new loans.
FHA hasn’t specified when exactly it would implement the new rule, but in my estimate it should be around April, 2013. So if you are thinking of getting a new FHA loan it may be a good idea to do so before the new changes take effect.
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