In its first step to reform the government’s housing finance structure, and in a move that could potentially be a preview of higher mortgage fees, the Federal Housing Administration has increased the mortgage insurance premiums it charges to borrowers.
FHA says it will now charge another 25 basis points on 15- and 30-year mortgages. On average, borrowers will pay approximately $30 more per month on a typical $157,000 loan, says FHA.
The increase will help bolster FHA’s weak capital reserve account, which stood at $3.6 billion by year-end 2010. FHA has faced criticism for not maintaining adequate reserves for the loans it guarantees. The new fees are expected to generate about $3 billion a year for the fund.
In its defense, FHA has said the reserves were drained because of losses on rotten loans. The Administration projects that FHA has insured $218 billion worth of mortgages during 2010. FHA indicates the insurance premium increase could help nearly double its capital reserves on an annual basis. President Obama's budget proposal has already called for raising the premium by 25 basis points.
“After careful consideration and analysis, we determined it was necessary to increase the annual mortgage insurance premium at this time in order to bolster the FHA’s capital reserves and help private capital return to the housing market,” said FHA Commissioner David Stevens, in a statement. The FHA must by statute keep a rainy day fund, or a capital reserve, that’s equal to a minimum 2% of its outstanding loans. That rainy day fund plunged to 0.5% after the housing and mortgage markets crashed.
The upfront fee of 1% of the amount borrowed charged on FHA loans at the time the mortgage is originated will not change, notes Mortgageloan.com.“The fee increases mean that FHA borrowers will be paying about twice as much for mortgage insurance on a 30-year loan than they would pay for private mortgage insurance (PMI) on a non-FHA mortgage,” Mortgageloan.com estimates.