FHA set to increase fees paid by new borrowers
Friday, August 6, 2010
The Federal Housing Administration plans to raise the annual fees it charges new borrowers starting Sept. 7, which would add about $300 million a month to the agency's eroding cash reserves.
The insurance premiums are capped at 0.55 percent of the value of a loan. Earlier this week, the Senate voted to raise the cap to 1.5 percent. President Obama is expected to sign the measure this month.
But the FHA does not plan to raise the fees to the maximum level allowed, and it estimates that borrowers would pay about $38 more on average each month, agency officials said. The increase would not apply to current FHA loan holders.
Boosting the fees will give the agency a cash infusion and align its fee structure with that of private mortgage insurers, which were crowded out of the market as the popularity of FHA-insured loans grew.
The FHA does not make loans but insures qualified lenders against losses should loans go bad. By doing so, it enticed lenders that had retrenched to reenter the mortgage market, providing crucial support to the housing market. In the past 18 months, about 30 percent of new single-family home purchases and about 20 percent of refinancing deals were backed by the agency.
But as the agency's loan volume rose, so did its default rate. The cash reserves that the agency had for unexpected losses dropped below the threshold required by law last year. The FHA is under pressure to replenish its capital. If its cash remains depleted, taxpayers could be forced to cover the agency's losses for the first time.
Raising the premiums is a quick way for the agency to boost its cash cushion. It has resisted the move in the past for fear of shutting out qualified borrowers and hampering the housing market's recovery. But as the agency's finances worsened, housing officials relented.
Earlier this year, the FHA raised the upfront fees it charges borrowers. Those fees helped keep the agency cash-positive this fiscal year, with a net cash flow of $446 million as of June 30.
About a year ago, the FHA also asked Congress for authority to raise the annual fees. The increase was included in a broad FHA reform bill that passed the House in June. But when the Senate did not act on it, the FHA pushed for a free-standing bill that would allow for passage of the premium increase before Congress began its August recess.
"The premium is one of the more important measures," FHA Commissioner David H. Stevens said. "The desire to expedite that is simply a practical move."
Once Obama signs the measure, Stevens said the agency plans to raise the fee to 0.85 percent for new borrowers who have 5 percent equity and 0.9 percent for those with less than 5 percent.
The agency will also lower the upfront free from 2.25 percent to 1 percent. That will lighten the burden on consumers, he said. The upfront fees can be paid at closing or rolled into the loan.
The FHA has not given up on the broader reform measure, which the Senate plans to consider after the break. The proposal focuses on granting the FHA tougher lender enforcement capabilities.