FHA Solvency Plan Raising Borrower Costs

The FHA is trying to avoid a bailout by generating more income. While a pickup in the housing market will increase revenues from new loans, this isn’t considered to be enough. The popularity of the FHA loan is primarily the low down payment requirement, still as low as 3.5 percent to 5 percent. Borrowers who seek these loans are generally middle class and short on funds for the 20% minimum required down payments for other conventional mortgages.

Of course, with a lower down payment, the lender assumes more risk. With this increased risk comes a higher mortgage interest rate. In the past, this higher rate was required only during the first few years of the loan. New FHA plans are to shore up their finances by charging the elevated rate for as long as the full 30 years of the mortgage. The normal insurance premium that borrowers must pay to be backed by the FHA is normally dropped once the mortgage is paid down enough to create a 20% equity.

Under the old rules, at a 5% mortgage interest rate, the insurance premium would go away after approximately 7 years. Now the FHA wants to extend the mortgage insurance premium for the life of the loan. In fact, this requirement is being put into place next month. The consensus is that the FHA is in a deep financial hole, and this is just one of several fixes in the works. The FHA estimates that had this permanent insurance charge been in place over the previous three years, it would have increased revenues by more than $10 billion.

While the current laws mandate that mortgage insurance by cancelled once equity reaches 20%, the FHA is specifically exempted. Some say that the FHA doesn’t really need the money anyway. With home prices rising again and more buyers entering the market, the FHA’s finances have begun to improve without these changes. Some private mortgage insurance companies are actually advertising that they can create a better long term situation for the borrower if they avoid the FHA.

Investors normally don’t get that involved with the FHA, as the only investor loans that are made are for one to four unit properties with the borrower occupying one of the units. However, the increased costs of ownership will probably contribute to the increased demand for rental property for some time to come.