A Letter from Scott Weghorst, President of Diehl Mortgage Training and Compliance
Scott Weghorst President of Diehl Mortgage Training and Compliance serving the mortgage industry since 1983.
FHA MI REDUCTION
FHA's first mortgagee letter of the year is a big one. As you may have heard by now, the MIP is dropping substantially. You may be thinking about the reduction and some of the following questions...
Why the reduction? HUD Secretary Julian Castro announced the reduction based upon the current status of the MMI fund growing $3.8B to 2.32%, above the 2% reserve. Castro also pointed to FHA's desire to "pass along some modest savings to working families". Ed Golding, Principal Deputy Assistant Secretary of HUD stated, " This conservative reduction in our premium rates is an appropriate measure to support them (middle-class families) on their path to the American dream.”
Who wins? FHA lenders and FHA borrowers with an estimated savings of $500 this year. Ultimately FHA wins by advancing the dream of homeownership responsibly and to more people at a lower cost.
Who loses? Critics fear that the reduced premiums will result in a smaller FHA insurance fund which raises risk and the potential of government intervention being required at some point. Personally, if you've been in the mortgage industry, you may feel that this fear is unfounded. FHA has been serving the borrowers since the great depression and the reserve levels have proven adequate. With the fund solidly above the 2% reserve it seems appropriate to lower the cost.
Who else loses? Without naming names, let's just say that private mortgage insurance companies' share values dropped around 2 to 3% yesterday as the change was announced. over time that will moderate as well. We don't see this as significant or having any long term negative impact.
What are the "nuts and bolts" of the change? FHA has done away with loan size being a factor in the annual MIP calculation. It will still be based on LTV and loan term. For loans terms longer than 15 years, this means an average reduction of 37%. Looking a little deeper, loan amounts greater than $625,000 see the biggest MIP decrease with just under a 44% drop. What about those loans with terms of 15 years or less? For those, the reduction averages 46.17%. The biggest drop is for loans more than $625,000 and borrowers putting at least 10% down. Their MIP reduction is almost 65%!
What doesn't change? The hefty down stroke for the upfront MIP which is currently 1.75%.
How does this measure up against private MI? The monthly MI certainly gets more attractive now with the reductions that FHA is implementing and the upfront MIP is really the big difference. Will the borrower see this? Time will tell, but the real question becomes...
Which will borrowers focus on more- upfront MIP or the monthly payment? It may depend on who's paying the upfront MIP. If it's being paid by seller concessions, it may not be perceived as a cost. Outside of that, you have a lot of dollars being paid upfront compared to private, but normally with lower monthly payments. Remember that private MI eventually goes away and even though FHA has dropped, FHA MI is still paid for the life of the loan with LTVs greater than 90%.
How will all of this unfold in the coming year? It will be interesting to see if there any changes to how these issues are viewed under the incoming administration. Will they place greater value in FHA
reducing its costs, or will they see this as government protected competition against private industry?
When does this happen? The good news is that it's fast. FHA loans with a closing/disbursement date on or after January 27 will have the new lower MI. Also, good news that it is based on closing/disbursement dates and not case number assignment date like some changes. This eliminates numerous case number cancellations and new case number requests. The bottom line is with FHA's reserves growing, it makes sense to pass along reduced premiums to FHA borrowers.
We know that 2017 holds a lot of opportunity for the growing purchase market, and lower costs can certainly contribute towards that. The overall projections for 2017 from the Mortgage Bankers Association show approximately a 40% decline in refinances, but growth in purchases. The initial projections don't show growth in purchases completely offsetting the drop in refis, but a strong economy with perceivable positives in incomes and employment followed by more attractive program availability may help bridge that gap.
FHA Press Release 17-0003;
FHA Mortgagee Letter 2018-01; https://portal.hud.gov/hudportal/documents/huddoc?id=17-01ml.pdf