A few months back,our US Department of Housing and Urban Development (HUD), guided by Assistant Secretary for Housing-Federal Housing Commissioner Carol J. Galante, had determined that the best way to fix the financial woes of the FHA, was to have low-to-moderate income borrowers foot the bill. In “How the Payroll Tax Cut Is Costing Low Income Borrowers,“ I reported how Commissioner Galante had mandated increases to already expensive Mortgage Insurance Premiums (MIP), as a means to fund an underfunded 2% reserve requirement in the Mutual Mortgage Insurance (MMI) Fund and to offset lost revenues as a result of the payroll tax cut.
FHA mortgage consumers are primarily low-to-moderate income borrowers, forcing the financial burden for these initiatives on those who can least afford it.
At the time, FHA MIP was also funding (amazingly by law) the Temporary Payroll Tax Continuation Act of 2011, which as we know, ended on December 31st, 2012. So with no more payroll tax cut to be funded, the need to siphon (what the Vegas mob called “skimming”), MIP funds for this lawful but awful initiative no longer exists and the exorbitant mortgage insurance increases should be rolled back, or at least you would think so. But you would be wrong.
The end of the payroll tax cut did not result in a rollback of the increased MIP, in fact, exactly one month later, astonishingly, HUD issued Mortgagee Letter 2013-04 on January 31st, 2013, actually INCREASING the MIP and closing loopholes to existing FHA mortgage borrowers to prevent them from eliminating MIP through equity growth.
MMI Fund management and unprecedented delinquencies have rendered HUD’s ability to maintain the federally mandated 2% reserve requirement ineffective. In fact, HUD is reporting a “$16.3 billion deficit in its insurance fund for fiscal 2012 opening the door to a taxpayer bailout for the first time in its 79-year history.”
Clearly, HUD’s MMI Fund management strategies are absent real world analysis and have in fact failed to accomplish any meaningful results other than an unprecedented MMI Fund deficit. Squeezing more dollars from a shrinking pool of already stretched-to-the-limit FHA mortgage consumers is ill conceived and based on flawed analysis, and the results speak for themselves. If MIP dollars are no longer used to subsidize the payroll tax cut, but are instead used solely to replenish the MMI Fund shortage, surely this additional inflow will significantly eliminate the need for additional MIP cost increases for low-to-moderate income borrowers. This of course is merely my assumption and I am proven wrong, as Commissioner Galante’s Mortgagee Letter 2013-04 would confirm.
Central to this issue is the cost and the financial burden shouldered by mortgage consumers who cannot afford it. This is an under-the-radar tax on low-to-moderate income consumers, and it is absent implementation resistance because it is so well disguised as to be undetectable. This is not a headline grabbing tax increase and there is no mechanism for reporting it on a paystub or a tax return.It is a quiet, tacit, mandatory add-on for all FHA mortgage consumers, measured in basis points and virtually invisible to the naked eye. It is so well hidden as to eliminate any risk of push-back from those affected, it is an incremental cost incurred by those who have no other choice because they are part of a captive audience.
These new mortgage insurance costs add a 1.75% closing cost, or 1.75 points that are tacked on to the loan, along with another 1.35% added to the monthly payment! For a $250,000 loan, that is an additional $4,375 in UP FRONT costs, and you get to add that cost to your loan and actually make payments on $254,375. If FHA interest rates are 3.50%, add in the monthly FHA MIP of 1.35% and your effective rate is 4.85%!
Since August, 2010, Public Law 111-229 has given HUD sweeping authority to arbitrarily raise FHA MIP premiums at the discretion of the Secretary, with no additional oversight or justification required to warrant these increases. The slang term for this is blank check.
In her written testimony for the House Financial Services Committee Hearing on February 13, 2013, Assistant Secretary Galante lamented the “difficult choice” of having to increase mortgage insurance premiums for the fifth time in only three years, arguing that “the premium increases made since 2009 have, to date, yielded more than $10 billion in additional economic value for the Fund.” The unvarnished facts are that HUD has raised an incremental $10 billion over the last three years to replenish the MMI Fund, yet is reporting a $16.3 billion deficit for that fund in 2012. I submit that more effective fund management strategies may exist.
HUD’s program of continually increasing MIP is pricing low-to-moderate income borrowers out of the housing market. Historically low interest rates and bottom-of-the-trough housing prices have combined to increase the Housing Affordability Index (as reported by the National Association of Realtors) to record highs. But stir in increasingly costly mortgage insurance, and much of that affordability evaporates, turning homebuyers into wait-and-seers. FHA mortgage financing is the single biggest and in many cases, the only opportunity for “marginal” buyers to secure mortgage financing. HUD’s MIP pricing strategy is thwarting that opportunity and stalling the recovery in our housing markets.
I reiterate and propose the same solution I proposed back in October of 2012 when I posted “How the Payroll Tax Cut Is Costing Low Income Borrowers.” The solution to subsidizing the 2% reserve requirement for the MMI fund is to reduce FHA MIP premiums across the board. By lowering the costs associated with FHA mortgage financing, affordability increases for low-to-moderate income buyers and loan volume actually accelerates. More people buy houses because more people can afford to buy houses! The premiums may be smaller but there will be lots more of them! For streamline refinancing, same thing, eliminate the May 31st, 2009 cutoff date and open the program to all FHA borrowers regardless of when they closed.
FHA loans today are so thoroughly vetted, that the documentation requirements alone, significantly reduce risk profiles, defaults and foreclosures. Fewer defaults and foreclosures mean fewer dips into the MMI fund to make a lender whole when a loan goes bad. More MIP and fewer dips will result in a fully funded MMI pool with a 2% reserve.
I applaud HUD’s recent credit policy tightening, eliminating seller-funded down payment assistance and requiring larger down payments for borrowers with credit scores below 580. In fact, HUD should be braver and tougher with these high risk profiles. Common sense dictates that without skin in the game, buyers lack the DNA necessary to fulfill their end of the loan agreement, the repayment part, and are far more likely to walk away and default because they have nothing to lose but a big blemish on their credit report.
I have been a mortgage originator for 25 years and have seen thousands and thousands of credit reports, and I can state unequivocally that a consumer with a 580 credit score, is a consumer that is not able or is not willing to pay bills on time or at all.
Homeownership is not an inalienable human right granted by the United States Constitution or any other governmental or otherwise authority. Homeownership is strived for, earned and in many cases achieved. And sometimes it is not, but engineering homeownership for non-homeownership candidates has already given us a catastrophic housing and mortgage market collapse. We should learn from our recent history. HUD should increase the minimum credit score for FHA borrowers to 600 or 620, and the default rate for FHA loans will plummet.Forbes
So,lower MIP premiums to increase housing affordability and accelerate loan volume, load logic and common sense into the credit policy breach by raising credit score and down payment requirements. Loan defaults will retreat, MMI Fund reserves will be fortified and the housing market will be triumphant.
A few months back,our US Department of Housing and Urban Development (HUD), guided by Assistant Secretary for Housing-Federal Housing Commissioner Carol J. Galante, had determined that the best way to fix the financial woes of the FHA, was to have low-to-moderate income borrowers foot the bill. In “How the Payroll Tax Cut Is Costing Low Income Borrowers,“ I reported how Commissioner Galante had mandated increases to already expensive Mortgage Insurance Premiums (MIP), as a means to fund an underfunded 2% reserve requirement in the Mutual Mortgage Insurance (MMI) Fund and to offset lost revenues as a result of the payroll tax cut.
FHA mortgage consumers are primarily low-to-moderate income borrowers, forcing the financial burden for these initiatives on those who can least afford it.
At the time, FHA MIP was also funding (amazingly by law) the Temporary Payroll Tax Continuation Act of 2011, which as we know, ended on December 31st, 2012. So with no more payroll tax cut to be funded, the need to siphon (what the Vegas mob called “skimming”), MIP funds for this lawful but awful initiative no longer exists and the exorbitant mortgage insurance increases should be rolled back, or at least you would think so. But you would be wrong.
The end of the payroll tax cut did not result in a rollback of the increased MIP, in fact, exactly one month later, astonishingly, HUD issued Mortgagee Letter 2013-04 on January 31st, 2013, actually INCREASING the MIP and closing loopholes to existing FHA mortgage borrowers to prevent them from eliminating MIP through equity growth.
MMI Fund management and unprecedented delinquencies have rendered HUD’s ability to maintain the federally mandated 2% reserve requirement ineffective. In fact, HUD is reporting a “$16.3 billion deficit in its insurance fund for fiscal 2012 opening the door to a taxpayer bailout for the first time in its 79-year history.”
Clearly, HUD’s MMI Fund management strategies are absent real world analysis and have in fact failed to accomplish any meaningful results other than an unprecedented MMI Fund deficit. Squeezing more dollars from a shrinking pool of already stretched-to-the-limit FHA mortgage consumers is ill conceived and based on flawed analysis, and the results speak for themselves. If MIP dollars are no longer used to subsidize the payroll tax cut, but are instead used solely to replenish the MMI Fund shortage, surely this additional inflow will significantly eliminate the need for additional MIP cost increases for low-to-moderate income borrowers. This of course is merely my assumption and I am proven wrong, as Commissioner Galante’s Mortgagee Letter 2013-04 would confirm.
Central to this issue is the cost and the financial burden shouldered by mortgage consumers who cannot afford it. This is an under-the-radar tax on low-to-moderate income consumers, and it is absent implementation resistance because it is so well disguised as to be undetectable. This is not a headline grabbing tax increase and there is no mechanism for reporting it on a paystub or a tax return.It is a quiet, tacit, mandatory add-on for all FHA mortgage consumers, measured in basis points and virtually invisible to the naked eye. It is so well hidden as to eliminate any risk of push-back from those affected, it is an incremental cost incurred by those who have no other choice because they are part of a captive audience.
These new mortgage insurance costs add a 1.75% closing cost, or 1.75 points that are tacked on to the loan, along with another 1.35% added to the monthly payment! For a $250,000 loan, that is an additional $4,375 in UP FRONT costs, and you get to add that cost to your loan and actually make payments on $254,375. If FHA interest rates are 3.50%, add in the monthly FHA MIP of 1.35% and your effective rate is 4.85%!
Since August, 2010, Public Law 111-229 has given HUD sweeping authority to arbitrarily raise FHA MIP premiums at the discretion of the Secretary, with no additional oversight or justification required to warrant these increases. The slang term for this is blank check.
In her written testimony for the House Financial Services Committee Hearing on February 13, 2013, Assistant Secretary Galante lamented the “difficult choice” of having to increase mortgage insurance premiums for the fifth time in only three years, arguing that “the premium increases made since 2009 have, to date, yielded more than $10 billion in additional economic value for the Fund.” The unvarnished facts are that HUD has raised an incremental $10 billion over the last three years to replenish the MMI Fund, yet is reporting a $16.3 billion deficit for that fund in 2012. I submit that more effective fund management strategies may exist.
HUD’s program of continually increasing MIP is pricing low-to-moderate income borrowers out of the housing market. Historically low interest rates and bottom-of-the-trough housing prices have combined to increase the Housing Affordability Index (as reported by the National Association of Realtors) to record highs. But stir in increasingly costly mortgage insurance, and much of that affordability evaporates, turning homebuyers into wait-and-seers. FHA mortgage financing is the single biggest and in many cases, the only opportunity for “marginal” buyers to secure mortgage financing. HUD’s MIP pricing strategy is thwarting that opportunity and stalling the recovery in our housing markets.
I reiterate and propose the same solution I proposed back in October of 2012 when I posted “How the Payroll Tax Cut Is Costing Low Income Borrowers.” The solution to subsidizing the 2% reserve requirement for the MMI fund is to reduce FHA MIP premiums across the board. By lowering the costs associated with FHA mortgage financing, affordability increases for low-to-moderate income buyers and loan volume actually accelerates. More people buy houses because more people can afford to buy houses! The premiums may be smaller but there will be lots more of them! For streamline refinancing, same thing, eliminate the May 31st, 2009 cutoff date and open the program to all FHA borrowers regardless of when they closed.
FHA loans today are so thoroughly vetted, that the documentation requirements alone, significantly reduce risk profiles, defaults and foreclosures. Fewer defaults and foreclosures mean fewer dips into the MMI fund to make a lender whole when a loan goes bad. More MIP and fewer dips will result in a fully funded MMI pool with a 2% reserve.
I applaud HUD’s recent credit policy tightening, eliminating seller-funded down payment assistance and requiring larger down payments for borrowers with credit scores below 580. In fact, HUD should be braver and tougher with these high risk profiles. Common sense dictates that without skin in the game, buyers lack the DNA necessary to fulfill their end of the loan agreement, the repayment part, and are far more likely to walk away and default because they have nothing to lose but a big blemish on their credit report.
I have been a mortgage originator for 25 years and have seen thousands and thousands of credit reports, and I can state unequivocally that a consumer with a 580 credit score, is a consumer that is not able or is not willing to pay bills on time or at all.
Homeownership is not an inalienable human right granted by the United States Constitution or any other governmental or otherwise authority. Homeownership is strived for, earned and in many cases achieved. And sometimes it is not, but engineering homeownership for non-homeownership candidates has already given us a catastrophic housing and mortgage market collapse. We should learn from our recent history. HUD should increase the minimum credit score for FHA borrowers to 600 or 620, and the default rate for FHA loans will plummet.Forbes
So,lower MIP premiums to increase housing affordability and accelerate loan volume, load logic and common sense into the credit policy breach by raising credit score and down payment requirements. Loan defaults will retreat, MMI Fund reserves will be fortified and the housing market will be triumphant.