David H. Stephens, the Assistant Secretary for Housing / Housing Commissioner released today a special notice with the intent of decreasing the annual upfront MIP down to 1% (currently at 2.25%) with a simultaneous increase in the annual MIP to 0.85-0.90% (currently at 0.50-0.55%). The anticipated case number assignment effective date is September 7th 2010. The bill still needs to be signed into law.
"With this authority, FHA is in a better position to address the increased demands of the marketplace and return the MMI fund to congressionally mandated levels without disruption to the housing market."
"As I have previously stated in my testimony before Congress, FHA will lower its upfront premium simultaneously with the increase to the annual premium¹. It is our intention that effective on September 7, 2010, FHA's upfront mortgage insurance premium will be adjusted down to 100 basis points on all amortization terms and the annual mortgage insurance premium will increase to 85-90 basis points on amortization terms greater than 15 years². A Mortgagee Letter will be forthcoming once President Obama signs the bill into law, but with today's passage of H.R. 5981 and our expedited implementation schedule, I wanted to immediately inform the industry of our plans so the lending community can begin preparing for the operational and system changes required to implement FHA's new mortgage insurance premium structure on all new case numbers by September 7, 2010."
"LTV's <= 95% will increase to 85bps and LTV > 95% will increase to 90 bps."
Some real rough purchase math:
|Currently:||New Bill tentatively planned to go into effect September 7th:|
|$300,000 Purchase||$300,000 Purchase|
|$289,500 Base Loan (3.5% down)||$289,500 Base Loan (3.5% down)|
|$296,013 Borrowed (with 2.25% upfront MIP)||$292,395 Borrowed (with 1% upfront MIP)|
|$1,592 / year in annual MIP (at 0.55%)||$2,605 / year in annual MIP (at 0.9%)|
Each year the new bill will cost $1013 more in annual MIP charges in the above scenario, or about $80/month in additional total monthly payment**.
Difference with new bill if owner were to sell their FHA mortgaged home at the:
Start of loan: $3618 upfront savings under new bill
End of Year 1: $1013 more annual MI (New Bill Total Savings $2605)
End of Year 2: $1013 more annual MI (New Bill Total Savings $1592)
End of Year 3: $1013 more annual MI (New Bill Total Savings $579)
End of Year 4: $1013 more annual MI (New Bill Total Cost $434)...
Borrowers stop paying annual MIP when the value reaches 78% of the original loan (paying the minimum this will be approximately 11 years into the mortgage), or 7 more years x $1013/yr for a total new cost of $7525 of the proposed changes in this scenario.
** The above scenario does not take into account if the borrower were to apply their slightly reduced principal and interest payment difference towards principal, also the borrower may move or refinance prior to completion of the 11 years.
In summary, the bill actually seems to save the borrower overall equity over the first few years in the property, however, if they stay in it for the duration and do not pay down additional principal to get to 78% LTV prior to 11 years (5 years minimum on 30 year terms) it does net the FHA Mutual Mortgage Insurance Fund more money.
I don't see this as a drastic change and FHA mortgages are still a fantastic option to many borrowers. Ok... it is obviously a strike against borrowers, but would you rather there be no FHA insured mortgages at all?
P.S., also remember that shortly FHA is trying to lower the limit seller concessions to 3% (down from 6%).