Big Change to FHA MIP Structure and More
By Rhonda Hammond
FHA recently released their 2012 Annual Report to Congress and it was not good. As a result of bad loans made in the last several years, the Mutual Mortgage Insurance (MMI) fund capital reserve ratio is currently negative. Among other changes, in an effort to rebuild the MMI fund and protect FHA’s financial health, the FHA has announced significant changes to its MIP structure as outlined in Mortgage Letter 13-04. Please note that FHA has announced a free conference call for Friday, February 8. All of these changes will be addressed during the call. The details are noted below.
MIP increase beginning April 1, 2013
For case numbers assigned on or after April 1, 2013, annual mortgage insurance premiums paid on most FHA insured loans will increase by an additional 0.10 basis points (0.1% of the loan amount). The increase applies to all loan terms, including 15-year fixed-rate FHA loans.
FHA Mortgage Insurance will continue for the life of the loan starting June 3, 2013
For case numbers assigned on or after June 3, 2013, there will no longer be exemptions from the annual MIP for loans with terms of 15 years or less and Loan to Value (LTV) ratios of less than or equal to 78% at origination. Currently FHA mortgage insurance is eliminated after a loan is paid down to 78% of the original balance. This change was made in 2001. Now HUD requires all FHA mortgage insurance to continue for the life of the loan. FHA insures 100% of the remaining balance, so if a homeowner defaults on their mortgage after the MIP has been removed, FHA is still insuring the loan. Analyses conducted by FHA’s Office of Risk Management projects lost revenue by about $10 billion in the 2010-2012 time period as a result of the current policy.
Manual Underwriting required for certain FHA borrowers starting April 1, 2013
As announced in Mortgagee Letter 13-05, for case numbers assigned on or after April 1, 2013, FHA will require manual underwriting for all transactions where the borrower has a decision credit score below 620 and the debt-to-income ratio exceeds 43.00%. HUD expects that by the effective date of this Mortgagee Letter HUD’s Technology Open to Approved Lenders (TOTAL) scorecard will be issuing scoring recommendations of Refer for loans where the borrower has a decision credit score below 620 and the debt-to-income ratio exceeds 43.00%. However, if the loan receives a scoring recommendation of Accept from HUD’s TOTAL scorecard, the loan must be manually downgraded to a Refer scoring recommendation.
FHA raising down payment on loans above $625,500
HUD has announced a proposed increased down payment requirement for mortgages for FHA insured loans over $625,500, with certain exemptions. The minimum down payment for these mortgages will increase from 3.5 to 5 percent. This change, coupled with the statutory maximum premiums charged for these loans, will help protect FHA and further facilitate its efforts to encourage higher levels of private market participation in the housing finance market. Comments are due March 8, 2013. To review the register, please click here: Federal Register 02062013.