The Federal Housing Administration, under pressure from U.S. senators and bankers, is reducing costs to homebuyers who put as little at 3.5 percent down.
The move, effective on FHA loans with case numbers assigned on or after Jan. 26, 2015, lowers mortgage insurance premiums by one-half percent on FHA loans with terms longer than 15 years.
Aside from new FHA loans, the premium reduction is also available for FHA borrowers who have had their loans for longer than six months through what is called an FHA Streamline Refinance. Streamlines are no-cash-out refinances designed to lower the borrower’s monthly payment. In many cases, neither an appraisal nor income documentation is required.
The insurance premium reduction is expected to save more than two million FHA homeowners an average of $900 annually and spur 250,000 new homebuyers to purchase their first home over the next three years, according to the U.S. Department of Housing and Urban Development (HUD).
In December, a group of 18 senators and several bankers and lenders from trade organizations across the nation sent a letter to FHA and HUD saying mortgage insurance premiums on FHA mortgages are too high and are making FHA loans less affordable for lower and middle-income home buyers.
The FHA doesn't provide mortgage loans but insures lenders in case of default. In exchange, FHA requires mortgage insurance on all of the loans they insure. The insurance protects the lenders, but the homebuyer pays the premiums on it.
In November, FHA released an independent audit showing its insurance fund had an economic value of $4.8 billion at the end of September, up from negative $1.1 billion in the previous fiscal year. Its capital reserve ratio improved to 0.41%, still well short of the mandated minimum and lower than had been projected the previous year.
President Obama recently said the FHA will also do more to make lenders more comfortable with FHA-backed mortgages.
”It’s going to be very helpful to get some households off the sidelines and into the housing market,” Julia Gordon, director of housing finance and policy at the left-leaning Center for American Progress, told the Wall Street Journal. “It’s a prudent step that doesn’t completely roll back the premium increases but helps makes loans more affordable.”
The agency is required to maintain a capital buffer of at least 2 percent of its loan guarantees. Its reserves plummeted as losses mounted during the housing crisis, and the FHA hasn’t met that threshold since 2009. In 2013, the agency required a $1.7 billion bailout, its first in 79 years.
Some critics called the rate reduction premature, but National Association of Realtors President Chris Polychron applauded the move.
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