Some of the FHA’s traditional customers may find that conventional alternatives are cheaper.
The Federal Housing Administration is the largest source of low-down-payment mortgage money in the country. Its minimum down is just 3.5%, compared with 5% to 20% or more from conventional, non-government sources. For decades, FHA financing has made homeownership possible for first-time buyers with modest incomes and credit history blemishes.
But in the wake of losses tied to bad loans insured during the housing bust years, the FHA has been raising its loan insurance fees and backing more loans to applicants with higher credit scores. With the latest increases, things have gotten to the point where some lenders wonder whether the agency is trying to move away from its traditional customers.
Dennis C. Smith, broker and co-owner of Stratis Financial Corp. in Huntington Beach, is blunt: “I think FHA is putting itself out of business with the moves they’ve made in the past couple of years.”
Although they wouldn’t agree with that assessment, the FHA’s top officials readily admit that their priority is not increasing market share but protecting the agency’s multibillion-dollar insurance fund reserves and cutting losses.
Starting April 1, the FHA’s annual mortgage insurance premiums for most new loans will jump one-tenth of a percentage point (10 basis points in lending parlance). This is on top of two previous increases since 2011.
Other changes that won’t take effect until June 3 include mandatory manual underwriting of applications by borrowers whose total household debt-to-income ratios exceed 43% and who have credit scores below 620, and mandatory 5% minimum down payments on FHA loans above $625,500 in high-cost areas such as California, metropolitan Washington, D.C., and others.
The FHA also announced that as of June 3 it is rescinding its popular policy of canceling mortgage insurance premium charges for borrowers whose loan balances decline to 78% of the original amount. This will require FHA customers to pay premiums for as long as they keep their loans, and is in stark contrast to the private mortgage insurance market, in which homeowners can request cancellation of premium payments once their loans hit the 78% mark.
“That stinks,” said Steve Stamets, a mortgage officer with Apex Home Loans in Rockville, Md. “It’s just a money grab” that will cause creditworthy borrowers to avoid FHA loans and seek out low-down-payment alternatives through Fannie Mae and Freddie Mac, using private mortgage insurance.
Already, Stamets said, FHA is the more expensive option for many borrowers who have good credit but don’t want to make hefty down payments.
He estimates that with the FHA’s new fees, an applicant with a 720 FICO score making a 3.5% down payment on a $250,000, fixed-rate, 30-year FHA mortgage will pay $144.66 more a month than a borrower with the same credit score on a conventional loan of the same amount with a 5% down payment and private mortgage insurance.
Even with a 680 credit score, the conventional loan is cheaper by $85 a month based on the FHA’s new fee levels, Stamets said. And those monthly premium payments can be canceled at the 78% loan-to-value level, whereas the FHA will keep charging them for the life of the mortgage.
Steven R. Maizes, managing director of mortgage banking for Mortgage Capital Partners Inc. in Los Angeles, says the FHA’s new fees and policies are likely to cost the agency valuable low-risk business on refinancings. Maizes recently ran a spreadsheet analysis for a client with a $460,000 FHA loan at 5%. Even with a 1.5-point rate reduction, the added fees caused the monthly payment to decrease just $97.11.
“If you couple that [small saving] with the fact that the mortgage insurance payment can never go away,” he said, refinancing an existing FHA loan for a creditworthy borrower into a new FHA loan will be tough to justify.
Bottom line for you: Make sure your loan officer runs the numbers comparing FHA loans with privately insured conventional alternatives. You may not want to be saddled indefinitely with higher payments — and no right to cancel.