FHA Looks to Shore Up Finances with New MIP Changes


Federal Housing Administration
Commissioner Carol Galante has just announced several significant changes to
FHA requirements, processes, and fees
in an ongoing effort by the agency to
shore up its Mutual Mortgage Insurance Fund (MMI Fund.)  The first change – the consolidation of FHA’s
Standard Fixed-Rate Home Equity Conversion Mortgage (HECM) with its Saver Fixed
Rate HECM – was officially announced today. 
HECM is commonly referred to as a reverse mortgage and is available only
to homeowners over the age of 62. 

FHA said that the Fixed Rate
Standard HECM pricing option currently represents a large majority of the loans
insured through FHA’s HECM program and is responsible for placing significant
stress on the MMI Fund.  To preserve the program as a financial option for
aging homeowners FHA will make the HECM Fixed Rate Saver the only pricing
option available to borrowers who seek a fixed interest rate mortgage. 
Using the Fixed Rate Saver for fixed rate mortgages will significantly lower
the borrower’s upfront closing costs while permitting a smaller pay out than
the HECM Fixed Rate Standard product, thereby reducing risks to the Mutual
Mortgage Insurance Fund.  This change will be effective for FHA case
numbers assigned on or after April 1, 2013.  

Other changes for which official
announcements will be forthcoming over the next few days are:

  • An increase in annual mortgage
    insurance premiums
    (MIP) on most mortgages by 10 basis points or 0.10
    percent. Premiums on jumbo mortgages
    with balances of $625,000 or larger will increase by 5 basis points or 0.05
    percent. This will bring jumbo mortgage
    premiums up to the maximum premium authorized by Congress. These premium
    increases exclude certain streamline refinance transactions.
  • FHA will reverse its existing policy
    of cancelling MIP on loans when the outstanding principal balances reached 78
    percent of the original balance. Because
    FHA remains obligated to insure 100 percent of the outstanding loan balance for
    the life of the loan, homeowners will now be required to maintain principal
    payments over that period as well. 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.
  • FHA will require lenders to
    manually underwrite loans for which borrowers have a decision credit score
    below 620 and a total debt-to-income (DTI) ratio greater than 43 percent.
    Lenders will be required to document compensating factors that support the
    underwriting decision to approve loans where these parameters are exceeded,
    using FHA manual underwriting and compensating factor guidelines.
  • FHA will propose an increase in the
    minimum down payments
    for jumbo loans from 3.5 to 5 percent. The proposal will be published in the Federal Register within the next few
  • FHA will step up its enforcement
    for FHA-approved lenders with regard to aggressive marketing to
    borrowers with previous foreclosures. Borrowers
    are currently able to access FHA-insured financing no sooner than three years
    after they have experienced a foreclosure, but only if they have re-established
    good credit and qualify for an FHA loan in accordance with FHA’s fully
    documented underwriting requirements. It has come to FHA’s attention that a few
    lenders are inappropriately advertising and soliciting borrowers with the false
    pretense that they can somehow “automatically” qualify for an FHA-insured
    mortgage three years after their foreclosure. FHA will work with other
    federal agencies to address such false advertising by non-FHA-approved
  • Finally, as discussed in its Annual
    Report to Congress, FHA is also committed to structuring a new housing
    counseling initiative
    that would apply to a number of borrower classifications,
    including borrowers with previous foreclosures.

 “These are essential and appropriate measures to manage and
protect FHA’s single-family insurance programs” said Galante.  “In addition to protecting the MMI Fund, these
changes will encourage the return of private capital to the housing market, and
make sure FHA remains a vital source of affordable and sustainable mortgage
financing for future generations of American homebuyers.”

Here is the full document provided by HUD.

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