The Obama administration, in an effort to shore up the Federal Housing Administration’s finances, is set to increase the annual premium the agency charges borrowers for mortgage insurance.
Under a measure that cleared Congress this week, the FHA would get authority to raise the annual premium it charges borrowers to 1.55 percent from the current 0.55 percent. President Barack Obama is expected to sign the bill into law.
The FHA doesn’t make loans; it insures mortgages for borrowers who make a minimum 3.5 percent down payment and meet the agency’s other standards.
The new premium authority has been sought by the administration, which says it will allow the FHA to rebuild its capital more quickly. The agency has seen its capital reserves plunge to razor-thin levels after it took on an outsized role since the housing bust.
FHA Commissioner Dave Stevens has testified that he will use the new authority to raise the annual premium to around 0.90 percent. He will then lower the upfront premium to around 1 percent, after it increased to 2.25 percent from 1.75 percent this year.
The administration is also pushing Congress to pass legislation giving the FHA more authority to protect its insurance fund from claims on fraudulently or poorly underwritten loans. The legislation has passed the House and was introduced this week in the Senate.
The FHA estimates the new premium flexibility will generate about $300 million a month in additional positive receipts to its insurance fund, while costing the average FHA borrower $42 extra in monthly premium payments.
The FHA’s business has ballooned in the housing bust as borrowers have struggled to get conventional financing. The agency’s market share rose to about one-third of the mortgage market last year, up from 2 percent in 2006. Together, the FHA and government-run mortgage insurers Fannie Mae and Freddie Mac are providing backing for more than 95 percent of new U.S. mortgages.
To shore up its finances, the FHA has expelled more than a thousand lenders from its program in recent months and tightened its credit standards. For example, it now requires borrowers with down payments of less than 10 percent to have credit scores of at least 580.
Still, many critics argue the agency needs to go much further to avoid a taxpayer bailout. House Republicans pushed unsuccessfully earlier this year to raise the minimum FHA downpayment to 5 percent.
The higher premiums are unlikely to make a significant dent in the FHA’s market share given the current environment, with the private sector having scant appetite for mortgage risk.
“The FHA is still going to be the only game in town in the near term for lower-income and cash-strapped borrowers,” Mortgage Bankers Association Senior Vice President Steve O’Connor said.
