It appears as though FHA is poised to increase the annual premium on new applications for FHA insurance starting in January. Look for a Mortgagee Letter to be issued soon that increases the annual MIP by at least 10 basis points and eliminates the expiration of premiums on certain loans. I’ll be sure to post an update when final details are known, so stay tuned.
That being said, increasing premiums across the board is NOT the answer. As FHA gets more expensive, it just causes more borrowers to self-select out of the FHA program and into a comparable conventional program. As it stands today, 95-97% LTV programs on the conventional side are already less expensive for borrowers with good FICO scores who elect the monthly PMI option, AND conventional MI does not have an up-front payment (outside of split-premium). There is no incentive for low-risk borrowers to select a 30-year FHA loan, and maybe that’s as HUD wants it. We know they’ve been trying to pare-down their portfolio.
Unfortunately, HUD needs to face the truth and admit that it simply does not have the luxury of focusing only on its core clientele. To do so in the current context of “one size fits all” MI premiums is nothing short of suicide because it ensures deterioration in FHA’s credit quality (which has been quite high for the last few years). A deterioration in credit quality leads to a higher default rate, which leads to more claims paid, which leads to another hike in premiums, and so forth and so on.
It is time for HUD to go back to 2008 and re-institute the risk-based MI premium that was stopped with the passage of the Housing and Economic Recovery Act. Insurers can’t afford to pretend that everyone is equal in terms of risk; when someone with a perfect driving history purchases auto insurance, they aren’t charged the same premium as someone with two accidents and a DUI. Mortgage insurance is no different. It’s time for reality to set-in at the Federal Housing Administration, or endless taxpayer-funded bailouts are a virtual certainty.