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.
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