The Backer of nearly half of the nation’s mortgages during the first half of 2010 will soon be raising borrower fees. The Federal Housing Administration, as of June 2010, has guaranteed $857 billion in mortgage loans this year. That is an increase of 24% when compared to the first half of 2009. The FHA, which is not a lender, but an insurer of loans, has some of the most favorable terms in the industry. The government agency will guarantee loans with as little as a 3.5% down payment and according to Zelman & Associates, a mortgage research firm; the FHA has guaranteed roughly half of all mortgage loans made through June of this year.
In order to add to reserves, October 4 the FHA is raising annual fees that are charged to new borrowers. This will add an estimated $300 million a month to the FHA’s reserves. For now new borrowers, the 0.35% added to the annual insurance premium will equate to an average of $480 a year or $40 a month increase in their current mortgage payment. Currently, the insurance premium is 0.55% of the purchase price and is expected to be raised as high as 0.9%. While the annual insurance premiums are being raised, the upfront will be decreased from 2.25% to 1%. This upfront premium is required to be paid when the mortgage is taken out.
All this is being done because reserves at the FHA are declining rapidly. The number of loans that have defaulted in recent years has depleted the reserves. When are guaranteed loan defaults, the FHA must pay the loan balance to lenders. Presently, the FHA has been setting aside roughly 90% of the money obtained from fees to try to cover losses over the coming years. However, even with 90% monies being set aside, the FHA only has about $3.5 billion in reserves. That is down drastically from the $10 billion that the FHA had in reserves just a year ago.
The annual audit done this coming fall is expected to predict the amount of money the FHA needs to come up with to cover losses over the next 30 years. Presently, the FHA is sitting better than expected when compared to last fall’s projections. The FHA has had to pay out $3.7 billion less than expected in last year’s forecast.
The FHA is completing steps to regulate the quantity of funds that home-sellers can contribute to the buyers toward the closing costs of the home. As of now, the amount of money a seller can give to a buyer towards closing costs can total up to 6% of the purchase price of the home. The FHA is trying to reduce that amount to a maximum of 3%. If those steps are finalized, there will most likely be a reduction in sales among builders of homes that rely on guaranteed backing of loans by the FHA.
Original Post: The Wall Street Journal
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