By now you've probably heard or read that beginning with new case numbers issued on October 4, 2010, FHA is changing how two key charges are calculated. For the most typical FHA transactions the changes are:
1. The Up Front Mortgage Insurance Premium (FHA's revenue generated by loan) is being reduced 1.0% of the base loan amount (formerly 2.25%).
2. The Annual (collected monthly as part of your payment) Mortgage Insurance is increasing to 0.90% of the base loan amount (formerly 0.55%). The mortgage insurance is the insurance set aside to cover some of the loss in the event of default.
While the net effect to borrowers is a higher monthly payment, I believe the change will result in a positive impact on our business and hopefully our country. This is what I am reading behind the math:
1. By making the change, U.S. Department of HUD Secretary Shaun Donovan is acknowleding that his government agency will operate better with a higher rate of monthly income (the new math) rather than hope to manage it's budget under the old math. The old math required FHA to save some of the up front revenue in reserves. Clearly that strategy wasn't going to last much longer.
2. The resulting higher payment to borrowers will result in a shift towards more Conventional financing. FHA lending has dominated the marketplace for the past 2 years and the change signals a start to return to a more normal lending environment. The key word is "start." Private mortgage insurance companies have already begun enticing borrowers back to Conventional financing with lower PMI rates. It remains to be seen if the big banks will also help by beginning to use some common sense in the lending process. We don't need them to relax underwriting guidelines, we need common sense, rational decision making.
Since I don't hold out a lot of faith that the big banks will adopt common sense thinking, perhaps it is best left in our hands. You can voice your opinion to the banks by taking your business elsewhere. And of course you can voice your opinion on November 2nd during the mid-term elections.
Perhaps FHA's newest changes will lead to more and bigger changes. But that will be up to us.
