Thursday, May 13, 2010

David Stevens, FHA Commissioner, Responds

Yesterday's post was about HR 5072 sponsored by Maxine Waters, (D CA), which is entitled "FHA Reform of ACT of 2010".

A few hours after I posted this blog, I received the following email from FHA Commissioner David Stevens:
"There is a huge factual error in this. The current premium is 2.25% up front and .55% annually. Under the legislation, FHA will have the authority to raise the annual higher but as stated the fees will be changed as follows: the upfront will drop from 2.25% to 1% and the annual will go from .55% to .90%.

The trade off is easier for the market by lowering the upfront it impacts initial equity less and the trade off is the increase to the annual.

The blog below has missed the actual proposal as I testified to in committee and as Ms. Waters would state as well."

After receiving Mr. Stevens' email, I re-read the text of HR 5072. The text of the bill as it reads states that the annual premium is being increased from a maximum of .55% to a maximum of 1.55% so I emailed him back promising to make note of his comments in today's post and asking him for clarification on this point. He responded "The 1.55% is simply to get room for the many years to come without ever having to go back to Congress."

The text of the Congressional bill does not reduce the up front MI--it says nothing about this whatsoever. So I did some additional research.
The testimony that Stevens refers to in his above email is written testimony which he provided to Congress on March 11 which can be viewed by going to and then clicking pressroom tab. In this testimony he states, "The increased presence of FHA and others in the housing market, including Fannie Mae and Freddie Mac, has helped support liquidity in the purchase market, helping us ride through difficult times until private capital returns to its natural levels." How increased? We noted yesterday that FHA had 2% market share in 2005. In Fiscal year 2008, according to Steven's testimony, FHA insured over 1.1 million single family loans, and this number was about three times what they had insured in 2007. In 2009, FHA insured about 2,000,000 homes. So the growth has been huge, which has caused a decrease in FHA's Congressionally mandated reserves.

In 2008, as part of the Housing and Economic Recovery Act, Congress authorized FHA to raise the upfront MI to a maximum of 3%. In January of 2010, FHA issued a mortgagee letter which increased the upfront MI to 2.25% and this went into effect with loans with FHA case numbers issued after April 5. As part of his testimony, Stevens presented Congress with the proposed FY 2011 budget, and the budget which has been proposed does call for lowering the upfront MI to 1% for fiscal year 2011 and raising the annual MI, which is paid as a monthly fee by the borrower, to .90%. The testimony contains a chart to show how this would affect the borrower's payment. For a purchase price of $176,000, under the current MI structure, the loan amount would be $169,840.00, the loan amount with current upfront MI at 2.25% would be $173,661, the principal and interest would be $986.00, the estimated PITI (principal, interest, taxes and insurance) would be $1360.00 and the PITI plus FHA premium would be $1434.00. (All of the loan examples on the chart assume a 5.5% interest rate.)

The new plan proposed for the 2011 budget shows that for the same sale of $176,000, with a loan amount of $169,840.00, the loan amount with the upfront MIP at 1% would be $171,538.40, the principal and interest would be $974.00, the PITI would be $1348. and the PITI plus the FHA annual premium would be $1475.00, which is an increase of $41.00.

Remember that these changes are not written into the law. They are proposed budgetary changes which are in the new budget for 2011 which has been submitted to Congress. These changes would undoubtedly be implemented by a new mortgagee letter (a mortgagee letter is the means by which FHA announces and implements policy changes). The Housing and Economic Recovery Act, combined with HR 5072 gives FHA the authority to raise the up front MI as high as 3% and the annual MI as high as 1.55% if they choose to exercise those options in the future.

Stevens asserts in his testimony that one reason for the proposed changes is to bring FHA's pricing more in line with private mortgage insurance companies and "enable robust competition."

At the end of the day, robust competition is the only thing that is going to keep prices down and get the real estate market back on track. At a time when about 50% of new home purchases are FHA or government loans, there is just too much strain on a system that was never designed to be the primary lender for all Americans.

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