FHA has just announced that it will dramatically cut the cost of mortgage insurance premiums. Current mortgage insurance premiums are 1.25% of the loan’s value. This amount will be reduced to .85%.
This will result in a savings of about $900 a year for most typical buyers. It is about a 37% reduction in your mortgage insurance premium. This is a huge savings for your average family but it appears it will only impact new loans.
Read below- FHA to reduce mortgage insurance premiums and how this will impact the market in 2015:
From Marketwatch by Steve Goldstein
WASHINGTON (MarketWatch) — On a day when President Barack Obama spoke about his administration’s new housing policy, here are five questions, and answers, on the Federal Housing Administration’s decision to cut annual mortgage insurance premiums.
How much are we talking? There will be a 0.5 percentage-point drop in annual premiums, from 1.35% to 0.85%. The White House estimates this will save $900 a year for new borrowers.
The upfront premium of 1.75% is not impacted by this.
When? No date has been announced, as of Thursday morning, but it appears to be imminent. Housing and Urban Development Secretary Julian Castro told reporters that the FHA is aiming for the end of the month to implement it.
Why now? The White House says it’s trying to help creditworthy families who can afford a home but have been shut out of the market because of the tight lending requirements.
It’s also because the FHA appears to be on a path to better financial footing. Solvency concerns had pushed premiums higher after they fell as low as 0.5% before the crisis. The FHA had been missing its target of holding capital equal to at least 2% of outstanding insurance. That ratio was negative in fiscal 2013, and 0.4% in fiscal 2014. But the FHA is now projected to meet its target by fiscal 2016.
But most notably, the cut comes amid competition from Fannie Mae FNMA, -6.10% and Freddie Mac FMCC, -6.61% the government-backed mortgage buyers that have started offering mortgages with down payments as low as 3%. Castro denied the Fannie and Freddie move had anything to do with the FHA decision.
Some Republicans in Congress have criticized the move. “The federal government should be winding down its involvement in the mortgage business, not engaging in a race to the bottom, and it is absolutely imperative that Congress follow through on housing finance reform this year,” said Sen. Bob Corker, a Tennessee Republican.
Castro said the FHA collected nearly four times as much revenue as the losses it projects from the 2013 portfolio. “We feel like it’s a reasonable time to take this prudent measure,” he said.
What’s the impact on the mortgage market? According to analysis from Goldman Sachs, FHA currently holds a 15% market share. An FHA mortgage requires a 3.5% down payment, and the average FICO credit score is 690, vs. 760 for Fannie- or Freddie-backed mortgages. They say the move could go beyond that 15% if some borrowers opt for FHA rather than conventional programs.
And how will that impact the housing market? The same Goldman Sachs analysis found that a one percentage-point rise in mortgage rates in 2003 led to an 11% decline in housing starts. So by that math — if FHA were to get a 25% share of the mortgage market — there would be 14,000 more housing starts over the course of the year than there otherwise would be.
To put that in perspective, the annual pace of housing starts in November was 1.04 million. So, it isn’t a lot. But it comes amid a backdrop of factors that are positive for housing, notably another decline in interest rates and a growing jobs market.
What about existing FHA customers? There doesn’t appear to be any benefit for them. The FHA has yet determined the applicability to those who have sought loans but haven’t had them as yet approved.