FHA Boosts Insurance Premiums to Cushion Defaults
CNBC Real Estate Reporter
In a move to shore up the FHA's beleaguered balance sheet, Commissioner David Stevens on Wednesday announced big changes at the government mortgage insurer that now backs about half of all home loans to the nation's minorities.
The FHA will raise the up-front Mortgage Insurance Premium, paid by borrowers, from 1.75 percent to 2.25 percent as well as request legislative authority to increase the maximum annual MIP that the FHA can charge. This is the second time in two years that it has raised the premium.
“Striking the right balance between managing the FHA’s risk, continuing to provide access to underserved communities, and supporting the nation’s economic recovery is critically important,” said Commissioner Stevens in a written release.
In addition, in order for new borrowers to qualify for the 3.5 percent down payment program, they will now be required to have a minimum FICO score of 580. Borrowers with a lower score will be required to put down at least 10 percent.
In previous interviews with CNBC, Commissioner Stevens said he wanted borrowers to have more "skin in the game," and this is clearly a means to that end. Some mortgage bankers had been concerned about a proposed change that would prohibit borrowers from financing the up-front premium, but that is not included in this announcement.
The FHA will also reduce allowable seller concessions, or how much the seller can help the buyer, from 6 percent to 3 percent. The change will give borrowers a greater financial stake in their home purchases, as well as brings the FHA into conformity with industry standards on seller concessions.
The FHA, which does not lend but only insures home mortgages, has been under increased scrutiny of late, as rising defaults put the agency below its required reserves. The authority went from insuring barely 3 percent of all home loans at the height of the latest housing boom to now backing an estimated 35 to 40 percent of new loans. It has been a significant player in housing's so far weak recovery.
“The changes announced today by the FHA represent an attempt to navigate a prudent course without negatively impacting access to credit or contributing to a further slowing of the housing market in communities of color," said David Berenbaum, Chief Program Officer at the National Community Reinvestment Coalition in a written release.
"While borrowers will bear more of the costs of the government insurance program through higher premium charges, the additional revenue will help ensure that FHA stays solvent."
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