Bowing to Congress, the Federal Housing Administration will discontinue risk-based premium pricing on its loan guarantee programs for one year beginning Oct. 1.
Under a new pricing structure announced this week, borrowers seeking FHA-guaranteed purchase loans will pay an upfront premium of 1.75 percent, regardless of their credit standing. That’s 25 basis points more than the 1.5 percent upfront premium in place before risk-based pricing was implemented in July, or an additional $375 on a $150,000 mortgage.
Troubled borrowers seeking to refinance under the FHASecure and Hope for Homeowners programs will pay a 3 percent upfront premium, a 75-basis-point increase over the current maximum rate for FHASecure, or an additional $1,125 on a $150,000 home loan.
The Department of Housing and Urban Development announced a risk-based pricing structure in May, saying it would save borrowers with good credit money while averting the need for a taxpayer bailout in the face of rising losses to its mortgage insurance fund.
Instead of charging all borrowers the same upfront premium, on July 14 FHA began using a sliding scale in which borrowers with good credit paid as little as 1.25 percent, and borrowers considered higher-risk paid as much as 2.25 percent. On a $150,000 mortgage, the difference between the old 1.5 percent upfront premium and the maximum 2.25 percent "risk-based" premium is about $7 per month, HUD said.
But some lawmakers questioned the system’s fairness. A sweeping housing bill signed into law two weeks after FHA implemented risk-based pricing, the Housing and Economic Recovery Act of 2008, included a provision requiring FHA to suspend the practice for a year (see story). The bill, HR 3221, also raised minimum down payments on FHA-backed loans to 3.5 percent, and eliminates seller-funded down-payment-assistance programs as a source of funding after Oct. 1.
In announcing the new FHA premium-pricing structure to comply with the congressional moratorium, Federal Housing Commissioner Brian Montgomery said mortgages that are assigned FHA case numbers between July 14 and Sept. 30 will use the risk-based premium structure for the life of the mortgage.
For loans assigned FHA case numbers on or after Oct. 1, the upfront premium charge for purchase mortgages and full-credit qualifying refinances will be 1.75 percent, regardless of the borrower’s credit. Streamlined refinances of all types will require a 1.5 percent upfront premium.
Annual premiums will be based on loan-to-value (LTV) ratios and loan duration. Most borrowers will pay 50 basis points a year (0.5 percent of the outstanding mortgage amount) if the LTV is less than or equal to 95 percent. For LTVs above 95 percent, annual premiums will be 55 basis points of the outstanding mortgage amount. Borrowers taking out loans to be repaid in 15 years or less will pay no annual premium if the LTV is less than or equal to 90 percent, and 25 basis points if the LTV exceeds 90 percent.
The new pricing structure mandates that delinquent borrowers refinancing under the FHASecure program pay a 3 percent upfront premium, up from a 2.25 percent cap in place now, and annual premiums of 50 or 55 basis points depending on LTV. The FHASecure program, created by the Bush administration in August 2007, is designed to help borrowers with adjustable-rate mortgage (ARM) loans refinance into more affordable fixed-rate loans backed by FHA.
HR 3221 authorized a new Hope for Homeowners program to guarantee up to $300 billion in refinancings of delinquent loans when lenders agree to write down principal and borrowers agree to share future gains on the sale of their home with the government. That program, scheduled to be rolled out Oct. 1, is not limited to ARM loans. Borrowers will pay an upfront premium of 3 percent of the original mortgage amount and an annual premium of 1.5 percent.
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