Obama Announces FHA MIP Cuts, No Changes for Reverse Mortgages

In an effort to further expand homeownership for first-time buyers, President Barack Obama announced a cut in Federal Housing Administration mortgage insurance premiums (MIPs), which will go into effect at the end of January.

However, the changes will not apply to the reverse mortgage program, a Department of Housing and Urban Development spokesman confirmed with RMD.

The annual fees the FHA charges to guarantee mortgages would be cut by 0.5 percentage points — taking the current annual fees from 1.35% of the loan balance to 0.85%. For the typical first-time homebuyer, this decrease will translate to a $900 reduction in their annual mortgage payment, according to a White House statement.

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Existing homeowners who refinance into an FHA mortgage will see similar reductions to their mortgage payments as well.

“This action will make homeownership more affordable for over two million Americans in the next three years,” said HUD Secretary Julián Castro, in a statement. “By bringing our premiums down, we’re helping folks lift themselves up so they can open new doors of opportunity and strengthen their financial futures.”

White House estimates show that these lowered premiums will help more than 800,000 homeowners save on their monthly mortgage costs and will enable up to 250,000 new homebuyers to purchase a home. The cuts will also support home sales, lower housing expenses for affected households and bring more balance to the housing market.

Today’s announcement comes four years after the FHA began increasing MIPs to offset losses caused by defaults on mortgages it backed after the market crash. In 2011, annual fees were just 0.55% before the increases.

Lowered MIPs, though, will continue to allow FHA to maintain a positive financial trajectory for the Mutual Mortgage Insurance (MMI) Fund. FHA is projected to add $7 billion to $10 billion annually in new capital reserves each year, as a result of improved risk management and a stronger housing market.

The FHA’s MMI Fund improved in 2014, posting its first positive balance in two years — the fund’s overall net worth improved by $6.1 billion in fiscal year 2014, increasing from negative $1.3 billion to positive $4.8 billion.

The FHA is required to keep enough funds on hand to pay for all future costs of defaulted loans, plus a 2% cushion. Previous reports indicate the agency is close to replenishing the troubled insurance fund.

In the coming months the Obama administration will be taking additional steps to clarify lending standards to build on the measures announced today.

Written by Emily Study

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  • What is going on? For several years now we have been hearing that HUD is being guided by its risk management team yet fiscal year 2014 ended with the MMI Fund only having a 0.44% reserve when by law it is required to be 2%. To be in compliance the MMI Fund fiscal year 2014 ending balance would have to have been 355% greater than it was or about $22 billion, rather than $4.8 billion.

    We saw the MMI Fund drop by $7.7 billion ($0.77 billion of which was a transfer out to another program) when HUD as of December 2013 or a little over a year ago predicted that the HECM portion of the MMI Fund would increase by $1 billion. That is a net difference of $8.7 billion. That is absolutely THE worst prediction HUD has made related to the HECM part of that fund. So if HUD has so little ability to predict how this program will do, how much better is it in predicting how its other MMI Fund programs will do?

    No doubt the President is relying on the predictions of HUD that next year the MMI Fund will be doing even better despite how poorly HUD’s prediction was for fiscal year 2014 for both the MMI Fund as a whole and the HECM portion of that fund. (He might do better using a cracked and fogged crystal ball; I’ve got one for sale.) But our President must do better on the housing front as he has promised again and again. Yet is exposing the MMI Fund to further risk the right way to do this? How much will he be gaining in comparison to what is at risk?

    We lost both our HUD Secretary and our FHA Commissioner this past fiscal year. Many of us wonder if the reason why they left HUD is because of the problem of accountability to Congress for the ridiculous and junky predictions both of them made in late 2013 and early 2014 about how well both the HECM portion of the MMI Fund and that fund as a whole would do in fiscal 2014. That was the Commissioner’s primary responsibility and she failed, and failed miserably.

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