The FHA, which does not originate but insures home loans with down payments as low as 3.5 percent, raised its annual premiums 140 percent during the housing crash. That priced thousands of borrowers out of the market. As of Monday, the premium falls by half a percentage point, from 1.35 percent of the loan balance to 0.85 percent of the loan.
"This is a very prudent step in the direction of providing middle-class families with opportunities for buying a home," said Castro.
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It is also about protecting the health of the FHA's insurance fund, which has gained $21 billion in value in the past few years, largely on the backs of new borrowers with pristine credit. Last year mortgage giants Fannie Mae and Freddie Mac (the government-sponsored enterprises) announced they would offer a 3 percent down payment loan for both new borrowers and those who wish to refinance.
The FHA stood to lose considerable market share if its best borrowers jumped ship to those new loans, which unlike the FHA, do not require mortgage insurance for the life of the loan. Losing those best borrowers could hurt the FHA fund.
"Certainly [Federal Housing Finance Agency] Director (Mel) Watt and the GSEs are doing some noteworthy things," admitted Castro, "but that is not the ultimate driver of this decision. The driver really is what is in the best interest of keeping the fund strong."
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