On Friday, December 9, 2015, HUD released Mortgagee Letter 15-01 which announced a 0.50% (50 bps) reduction of the FHA monthly mortgage insurance on most forward mortgages with terms greater than 15 years. This comes on the heels of months of lobbying by housing groups such as the National Association of RealtorsⓇ and the National Association of Mortgage Brokers.
Since 2010, FHA has been steadily increasing the monthly mortgage insurance rates to provide for the stability of the FHA Mortgage Insurance Fund. The Fund is what allows FHA to insure lenders against losses due to foreclosure; loss of the Fund means the loss of the FHA mortgage loan program. When foreclosure rates increased during the recession, FHA began to realize losses and determined the need to increase the premiums to raise the balance of the Fund.
More recently, housing groups began to argue that now that the Fund is flush with cash, FHA should lower the monthly mortgage insurance premiums to encourage greater usage of the FHA loan program. The lowering of the monthly mortgage insurance premiums (MIP) makes FHA more competitive in the marketplace (when compared to the mortgage insurance rates of Fannie Mae).
The chart below illustrates the changes in the rates that will be effective on and after January 26, 2015.
|Term >15 Years|
|Base Loan Amount||LTV||Previous MIP||New MIP|
|≤ $625,500||≤ 95.00%||130 bps||80 bps|
|≤ $625,500||> 95.00%||135 bps||85 bps|
|> $625,500||≤ 95.00%||150 bps||100 bps|
|> $625,500||> 95.00%||155 bps||105 bps|
|Term ≤ 15 Years|
|≤ $625,500||≤ 90.00%||45 bps||45 bps|
|≤ $625,500||> 90.00%||70 bps||70 bps|
|> $625,500||≤ 90.00%||70 bps||70 bps|
|> $625,500||> 90.00%||95 bps||95 bps|
The rate reduction does not apply to single-family forward streamline refinance transactions that closed on or before May 31, 2009 or to Section 247 mortgages on Hawaiian Homelands.
A basis point (or bp) is 1/100th of a percent. For a loan amount of less than $625,500 and a loan to value (LTV) greater than 95%, the mortgage insurance factor is 85 bps, or .85% of the loan amount. This factor is applied to the outstanding balance of the loan and then divided by twelve (12) to calculate the monthly mortgage insurance premium.
By comparison, the monthly mortgage insurance rates for a Fannie Mae loan of $200,000, 95.01% LTV and borrower credit score of 700 is 131 bps. For the same loan and borrower but for 95% LTV, the mortgage insurance factor is 89 bps.
While the mortgage insurance for an FHA is for “the life of the loan”, I believe that the lowered MIP will encourage borrowers to see FHA as a viable option for purchasing and refinancing. I placed “life of the loan” in quotes because the average life of an FHA loan is around 8 years. Lifetime FHA MIP is a red herring in my opinion.
I did find the second half of the Mortgagee Letter interesting in that FHA is temporarily allowing the canceling of Case Numbers that were assigned to loans that have not yet closed. This will allow lenders to cancel the Case Numbers (and therefore the loan) and obtain a new case number after 1/26/15 to allow borrowers to take advantage of the new, lower MIP rates.
In order to take advantage of the new MIP rates, lenders must first cancel the existing Case Number before it submits to acquire a new Case Number. Cancellation requests may begin on 1/15/2015 and must be submitted no later than 11:59pm, Eastern, on February 26, 2015.
This is encouraging news for condominiums with unit values in FHA’s “sweet spot” of $100,000 to $250,000. Until this announcement, FHA’s MIP was very expensive and made buying condominium units out of many buyers’ abilities. The lowered MIP rates will allow more borrowers to qualify to purchase units.
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