Tax Cut Extension Mandates FHA Premium Increase

Annual Federal Housing Administration reverse mortgage premiums could stand to rise following the passage by Congress of the payroll tax cut extension that took place in December.

Just in time for Congress’s holiday recess, the tax cut extension passed, providing for anextension of the Social Security tax cut of 4.2% (initially set at 6.2%).

The extension will in part be paid for by increasing guarantee fees charged to lenders by Fannie Mae and Freddie Mac.

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Additionally, under the legislation, FHA is required to hike annual premiums for 10 years, thus strengthening the FHA insurance fund. The change does not affect the upfront premium charged by FHA for insuring loans, however, according to the bill summary.

Where the increase will actually take place is unknown, but the administration is exploring its options for implementing the change.

“The legislation requires us to collect an additional premium of 10 basis points,” a Department of Housing and Urban Development spokesman told RMD in an email. “We are currently evaluating options for implementation of the requirement.”

As for the potential impact on the HECM program, the outcome is unknown, but reverse mortgages could stand to shoulder some of the burden.

“We can’t address the impact on specific programs yet,” the spokesman said.

Written by Elizabeth Ecker

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  • This act was so unusual that is not surprising FHA is having trouble implementing it.  Who would have thought the Democrats would propose using MIP to pay for a payroll tax cut and this President would have endorsed it?

    While no expert on how to fund government programs, this seemed a very inappropriately method of funding a tax cut especially with the FHA reserves so depleted.  So will Congress use MIP for funding other programs?

  • It’s unclear to me from what I’ve read whether the increased MIP is actually meant to be used to fund the tax cut, or whether it was just tacked on to the bill as a separate provision.  If the former, it seems both bizarre and typical of the way things have gone recently — let’s give a tax cut to working people by taking money from homeowners with FHA loans (the same working people, mostly).  Give with one hand and take away with the other.  Not to mention the fact that if FHA premiums are to be raised, it ought to be, as Elizabeth says, to strengthen the FHA insurance fund, not to pay for tax cuts.

    • rmcounselor,

      Under the original bill the guarantee fee provisions were under the heading “Offsets.”  It is because of that original structure  it is believed these are the offsets to the payroll tax reductions and, therefore, must not be treated as contributions to the MMI Fund of HUD/FHA.  That is not to say we are right on this point but only to provide insight as to why it is generally believed to be true.

      I have looked for official summaries of and reports on the Act, PL 112-78, and its Congressional bill number HR 3765 but there does not appear to be any available at this time which reflect the final Bill as enacted.

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