The Department of Housing and Urban Development has proposed a new system for collecting mortgage insurance premiums for many of the single-family home mortgages it insures.
Right now, mortgage insurance premiums under section 203 of the National Housing Act are set at one-half percent per year of the amount of the outstanding principal obligation of the loan, and are collected on a monthly basis.
Under the proposed system, the department would collect a one-time premium from the borrower when the mortgage loan is closed. However, most of the payment, which would purchase insurance coverage for the entire life of the insured loan, could be added to the mortgage amount and be amortized along with the underlying loan.
HUD said the premium would be based upon the projected costs payable from the insurance reserves, discounted to present value.
While the amount of the one-time premium would be a cost-based figure, HUD said it wouldn't be greater than an amount equivalent to 1 percent per year of the amount of the outstanding principal obligation of the mortgage at any one time.
The proposed system would be advantageous to both the homeowner and the department, HUD said.
The home buyer would have the option of paying the up-front premium in cash or of adding part--or almost all--of it to the amount of the mortgage for amortization along with the underlying loan. The proposed rule would increase the otherwise applicable maximum dollar mortgage amount by the amount of the premium payment that would be added to the mortgage. It would exclude the payment from the "cost of acquisition" used to determine minimum down-payment requirements.
These provisions would assure that implementation of the proposal would not reduce a purchaser's buying power or result in an increase in the required down payment, HUD said, except for small amounts that may result from the application of maximum loan-to-value ratios in some cases. In addition, the increase in the monthly debt service required to repay the amount borrowed for the up-front premium may be less than the monthly mortgage insurance premium that otherwise would have been collected for the mortgage, HUD said.
For HUD, the lump-sum collection would give the Mutual Mortgage Insurance Fund a source of interest-free funds for immediate investment by HUD in interest-bearing securities. Adoption of the proposal eventually would reduce its accounting workload of periodic billing, collection and allocation of premiums amortized as a separate component of the mortgage as those mortgages terminate over the years. In addition, it would relieve lenders of the burden of collecting and remitting to HUD monthly mortgage insurance premiums as they are received, the department said.
The proposed system would make possible a matching of fund income against default losses that HUD contends is safer than the current system. Up-front collection of the premiums would enable HUD to cover the period of maximum individual insurance risk--the early years of the loan term.