United States Department of Housing and Urban Development Seal (Photo credit: Wikipedia)
I read today that home building stocks have been soaring recently because the Mortgage Bankers Association released data showing that applications for home mortgages are at a multi-year high. As a mortgage broker, I am thrilled to see these solid signs of a housing recovery.
Howevever as people get back into the market and mortgage applications soar, most don't realize that the cost of mortgage financing has actually risen thanks to some funny funding business going on at the Federal Housing Administration (FHA). In response to a struggling housing market and a conservative lending environment, the FHA has added Cadillac pricing to their mortgage products to subsidize a congressionally mandated reserve requirement, and to pay for a tax cut! A price increase that has nothing to do with the risk profiles of the borrowers that depend on the FHA as a mortgage financing source, and everything to do with less than successful asset management and unabashed politics.
FHA loans have always required a “Mortgage Insurance Premium (MIP),” to fund the insurance pool used to subsidize lenders when an FHA loan goes bad. The insurance pool is the Mutual Mortgage Insurance (MMI) Fund and a Congressional mandate requires that this fund maintain a 2% reserve.
MIP is the FHA version of PMI (Private Mortgage Insurance), for conventional loans.
Like Fannie Mae and Freddie Mac, the FHA has had to manage unprecedented losses due to loans gone bad and one result is a battered and bruised MMI Fund. Add to that the Temporary Payroll Tax Cut Continuation Act of 2011, which by law is funded by increases to annual MIP premiums for FHA loans, and presto, the financial burden to fund these initiatives shifts to the low-to-moderate-income borrowers that are the primary customers of the FHA.
HUD press release 12-037 from February 27, 2012, quotes Acting FHA Commissioner Carol Galante; “These modest increases are one of several measures we are taking towards meeting the Congressionally mandated two percent reserve threshold, while allowing FHA to remain a valuable option for low- to moderate-income borrowers.”
Maintaining a 2% reserve in the MMI Fund is a prudent, make-sense business practice and although previous fund management practices may not have been able to deliver this reserve in the past, it is a welcome post-mortgage meltdown priority. Funding the 2% reserve through increased MIP premiums is not a prudent, make-sense business practice, because the people that can least afford it, must foot the bill.
That someone in government had a Eureka moment, and served up the idea of paying for the payroll tax cut with increased mortgage insurance premiums is extraordinary. One has nothing to do with the other, except for the fact that as a revenue source, FHA MIP premiums were only being used for what they were originally intended. All it took was a little politicking and suddenly, those who could least afford to, were paying the price.
FHA loans require “upfront” MIP and monthly MIP. The upfront portion is usually added to the loan amount and the mortgage payments are calculated based on the new total. The monthly MIP is calculated on the base loan amount. Before this funny business decision was made by the FHA, a $125,000 loan would require a 1% upfront MIP or $1,250 added to the mortgage for a total to be financed of $126,250. The monthly MIP used to be 1.1% of the $125,000 loan amount divided by 12 months, adding $114 to the monthly payment.
Things have changed. That same $125,000 loan now requires a 1.75% upfront MIP or $2,187 added to the mortgage for a total to be financed of $127,187. The monthly MIP is now 1.25% of the $125,000 loan amount divided by 12 months, adding $130 to the monthly payment. That adds an additional $937 to the loan amount and $16 more MIP costs to the monthly payment.
According to HUD 12-037, the FHA estimates, the increase to the upfront premium will only cost new borrowers an average of approximately $5 more per month. This is true, but when you add the additional $16 as a result of the increase in monthly MIP premiums, the incremental monthly cost becomes $21. An increase that has nothing to do with the risk profile of the borrower, which is what MIP mitigates! MIP and the MMI Fund insure FHA lenders from potential losses when FHA loans default, that is how it was conceived, and that is why it exists.
FHA MIP premiums now mitigate lender losses when a loan goes bad, replenish the reserves for the poorly managed MMI Fund and pay for the payroll tax cut. Actually, low-to-moderate income borrowers pay for all of this, since they are the ones paying the increased MIP premiums.
The analysis and presentation of the data arguing in favor of this increase is at best flawed, at worst manipulated to support the rationale for the change. Citing the monthly incremental cost at $5 is false. The $125,000 loan amount that I used to illustrate that the “$5” monthly increase is actually $21, is based on median housing prices in Florida and Nevada, two notoriously struggling housing markets. In New Jersey, where I live, median housing prices are closer to $250,000, so the “$5”monthly increase is almost $40.
The FHA considers these increases to be marginal and affordable for nearly all homebuyers who would qualify for a new mortgage loan. In other words, the increase is not considered material and can be easily absorbed by unsuspecting FHA mortgage consumers. The incremental cost to FHA mortgage consumers replenishes the under-funded MMI Fund’s 2% reserve requirements and subsidizes the Temporary Payroll Tax Cut Continuation Act of 2011. The success of this plan is based on current volume projections through Fiscal Year 2013, or so say the analysts over at the FHA.
The flaw in this plan is the reality of the housing and mortgage finance markets. Speaking from the field as a boots-on-the-ground loan originator, I have seen this plan reduce affordability for consumers and drive business toward FannieMae and FreddieMac. This of course reduces FHA loan volume and jeopardizes those FHA loan projections. Low-to-moderate income borrowers marshaling every available resource to buy a home do not have the disposable income necessary to implement these FHA initiatives.
Ironically, as many homeowners continue to struggle to pay their mortgage in our on-again, off-again economy, the FHA serves up a program that actually increases mortgage payments and adds to household budget stress.
There is more and there is a better solution. Here is the more in two parts.
First, FHA loan limits in some areas with more expensive median housing prices can be as much as $729,750. I helped a client close on a $539,900 home in northern New Jersey this month with an FHA loan and 3.5% down. The upfront MIP was $9,117, up from $5,210 and almost half the $18,896 down payment! The monthly MIP is $537.76, up from $477.59, and the resulting “$5” monthly increase is actually $127 and change.
Next, HUD press release 12-045 proudly announces lower upfront and monthly MIP for “certain FHA borrowers.” These are streamline refinance borrowers with an existing FHA mortgage that was originally secured on or before May 31st, 2009. The reduced MIP is material and according to Acting Commissioner Galante; “By significantly reducing costs for these borrowers, we can make certain they cut their monthly mortgage burden which will benefit the housing market and the broader economy in the process.” I totally agree and applaud this initiative from a standing, clapping, cheering position, but what about everybody else, what about everybody with post May 31st, 2009 dates?
Those people don’t get in the FHA MIP lottery ticket pool. Borrowers with post May 31st, 2009 FHA mortgages are excluded from the deeply discounted streamline financing premiums, and are subject to the new higher reserve-fund-subsidizing-payroll-tax-cut-paying premiums.
FHA Streamline refinancing is a cost effective process allowing existing FHA borrowers to reduce their monthly mortgage payments. For pre-May 31st, 2009 borrowers, the savings from securing a lower interest rate and reducing monthly MIP costs can be significant. That $125,000 Florida/Nevada mortgage with a 5.5% interest rate and $114 of monthly MIP can refinance today to a 3.5% interest rate and $57 of monthly MIP for a total monthly savings of $205!
That is if the loan was secured before May 31st, 2009.
So what about the after May 31st, 2009 $125,000 Florida/Nevada mortgage? The $149 saved each month with the lower interest rate is offset by the $130 increase in the monthly MIP. The $19 net savings does not pass the 5% threshold requirement to justify refinancing and no savings are realized because no refinance happens.
I am certain that analysis exists at the FHA to justify that May 31st, 2009 cutoff date, but by virtue of whatever that analysis is and this specific date, millions of homeowners are denied the opportunity to “significantly reduce costs, and make certain they cut their monthly mortgage burden which will benefit the housing market and the broader economy in the process,” or so says Acting Commissioner Galante.
For too many people, this opportunity does not exist. The “$5” monthly increase analysis presented as a minimalistic impact for target borrowers is on its face, false. Do the math. 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 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.
Mortgage loans today, especially FHA loans, 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.
The Payroll Tax Cut Continuation Act of 2011 has no business siphoning funding from FHA MIP premiums. Back when the mob ran Vegas, this was called skimming. Try explaining to an FHA borrower that they have to pay more for their mortgage insurance to replace lost government revenue from a tax cut. This is a hidden tax forced on low-to-moderate income consumers, it is absent disclosure and there is no recourse for targeted borrowers to protest, even if they knew! The law that authorizes the funding of the Payroll Tax Cut Continuation Act of 2011 through increased FHA MIP premiums should be repealed and a new source identified to foot the bill.
One last thing, since the Payroll Tax Cut is scheduled to evaporate in 2013, many of us in the home mortgage business are awaiting an FHA announcement about the MIP premiums being reduced. I for one wont be holding my breath.