Wednesday, August 27, 2008

FHA Raises Premiums to Insure Mortgages

The WSJ reports that the Federal Housing Authority (FHA) is going to raise the premiums it charges to insure that mortgages get paid. This is of course in response to the troubles over at Giant Mortgage Losers Fan & Fred (see our sidebar for the deathwatch).

The FHA is part of HUD, the Department of Housing and Urban Development. The FHA "has 4.8 million insured single-family mortgages and 13,000 insured multifamily projects in its portfolio."

Lenders would use the FHA as the "go to" place to help those for whom property ownership might otherwise have been out of reach. This market was co-opted by Sub-Prime lenders--the root of the current credit/housing crisis.

Some of the FHA's former parameters: No minimum credit score. Non-traditional credit is acceptable. Low 3% downpayment. Default assistance.

FHA loans were possible as long as a property met HUD's minimum property standards, and certain price parameters. The amounts available for Albemarle County are here. (Note the Single-family, Median, and "High Cost Area Exceptions." Interesting.)

WSJ reports on the coming changes, making FHA loans more expensive:
  • The upfront premiums charged to most borrowers will be 1.75% of the loan amount, effective Oct. 1.
  • That is up from the 1.5% that was in effect until July 14, when the FHA adopted a "risk-based" pricing system that created a range of charges depending on borrowers' credit scores and the amount of the down payment or equity [for a refi] they owned in the homes.
  • For instance: On a $300,000 loan, the new upfront premium works out to $5,250, up from $4,500.
  • At a time when house prices generally are falling, the share of new mortgages insured by the FHA has soared to 23% in July from a low of 1.8% in 2006, according to Inside Mortgage Finance, an industry newsletter.


Jason said...

I thought the risk based pricing model was a move in the right direction, particularly for the FHA's balance sheet. It also created a fairer system in which premiums were charged based on the borrower's default risk (credit scores). In other words, higher credit score borrowers weren't subsidizing lower credit score borrowers. I guess it's back to the good ol' days of "one size fits all".

A note regarding the FHA mortgage limits, in case it's not clear from the site - the max loan in the Charlottesville MSA is $425,000 (1 family home). The high cost limit is the max allowable (in designated high cost areas, like Northern VA). That limit, $729,750, is temporary and lasts until the end of the year. The high cost limit starting in 2009 will be $625k. BTW, your link to the link is missing the "h" in "http".

Real C'ville - The Bubble Blog said...

Thanks, Jason. Link fixed.

matt. s. said...

But Jason, aren't we now subsidizing the higher credit score borrowers?

They are the ones who were given, and are now defaulting on, exotic alt-a mortgages.

The idea that someone is unlikely to default in the future simply because they have a high score now appears to be a questionable premise.

Jason said...

I wouldn't say that the alt-a loans (stated, no income & option arms) are the culprit of the predicament we’re in. I think it's generally accepted that the mortgage/credit crunch and subsequent burst of the housing bubble started with the unwinding of the subprime loan market. Certainly alt-a loan defaults are rising significantly, along with prime and government loans (largely because of declining home values). And all of it will contribute to the big bailouts to come (FNMA, FHLMC, FHA). The current risk assessment models, which are credit score based, may not be perfect (statistics & algorithms can’t always predict human behavior), but I don’t think they need to be scrapped.
Here’s a link to an Inman News story about FHA’s implementation of the risk based premium:

Did anyone catch Obama’s acceptance speech?

Jason said...

Matt, sorry for the name mix-up.
Definitely time to hit the sack!