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More Lowlights than Highlights in HUD's Report to Congress
HUD's report on FHA's finances to Congress was a mere 64 pages. Here's the top (or bottom!) 10 summary for those who lack the time or motivation to peruse the entire report:
- FHA is losing money hand over fist. Despite increasing loan quality and mortgage insurance rates, FHA lost over $1.5 billion in 2012 to date.
- HUD's accountants had an overly rosy view of housing. Last year they projected housing values would rise 11.5% by 2014. This year's revised estimate is 4.8% appreciation by 2014, hardly a robust housing recovery!
- FHA borrowers and originators who were hoping HUD would extend its streamline refinance program were sorely disappointed. The program was scarcely mentioned, let alone expanded.
- Mortgage insurance costs are going up, again. A $200,000 FHA loan now carries a monthly cost of $208/mn. It will soon be $225/mn, not a huge increase, but significant, especially in conjunction with #5.
- Borrowers who want to take out FHA loans (refinance or purchase) need to start the loan process NOW. FHA mortgage insurance currently drops off when a borrower reaches 22% equity (and at least 5 years of payments). In a typical 30 year loan, the mortgage insurance lasts for a little over 10 years. After that, it's assumed that the homeowner is unlikely to default, and the insurance is no longer charged. HUD announced, however, that borrowers will soon be charged mortgage insurance for the entire life of their loans, meaning a $200,000 loan no longer costs $225/mn (with gradual decreases as the loan size drops) for 10 years. There will soon be MIP each month as long as they have their loan, certainly a significant "tax" on borrowers!
- FHA loan holders whose mortgage insurance will drop off at 22% equity would be exceptionally foolish to refinance to a new loan with lifetime MIP. So far in 2012, 274,066 homeowners have saved money with FHA's streamline loan program. By the second quarter of 2013, there will be a handful at best. FHA clients will no longer have the option to lower their rate without greatly increasing the lifetime costs of their loans.
- HUD wants borrowers to get financing elsewhere. As the report says, "despite FHA’s importance in providing liquidity and stability to the market throughout the housing crisis, its current role is out sized, and should and will decrease." Between borrowers' increasing monthly costs and longer MIP terms, HUD may soon become the lender of last resort for borrowers with less than pristine credit. HUD better hope it doesn't get exactly what it's wishing for though, as driving better borrowers to other loan programs could actually increase FHA defaults and losses!
- Minority and first time borrowers stand to lose the most with HUD's increased fees. In 2012, nearly 50% of black and Hispanic borrowers took out FHA loans. FHA's low down payments have long lured first time buyers, and 77% of FHA buyers in 2012 were purchasing their first home. Is substantially increasing costs to minority and first time buyers a sound housing practice? If a lender were doing so, it would likely cited for discrimination. Apparently HUD is exempt from this logic.
- Eliminating FHA refinances will cost HUD money as loans that don't close don't generate mortgage insurance premiums. In its haste to increase revenue, HUD may actually end up costing itself sorely needed funds.
- Slowing refinances is at odds with the Federal Reserves' current stimulus policy of buying mortgage backed securities. Low rate are great, but only if they end up benefiting borrowers.
FHA faces challenges to be sure. It is under capitalized, and has a large number of delinquent loans. Driving away new business with excessive fees doesn't seem the most prudent way to improve either its reserves or loan quality though, if you ask me.
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