FHA Increases Cost of Upfront Mortgage Insurance Premium (UFMIP)

This is a very important reminder that for any FHA Case Numbers assigned on or after Monday, April 5, 2010 the cost of UFMIP is going to increase from 1.75% of the loan amount to 2.25%. This is important as it is going to be more expensive to obtain an FHA loan. The increase will add $1,000 to the cost of getting a $200,000 FHA loan. A Case Number can only be obtained for a borrower who has applied for a loan and has an accepted purchase contract. Also, it can take up to 3 days to get a Case Number from FHA so to ensure the case number is assigned prior to the cutoff date it would be wise to request the Case Number as early as possible prior to Friday. FHA has proposed a number of upcoming changes which you can read about in my previous post.

Upfront Mortgage Insurance Premiums (UFMIP) are collected by HUD to cover the losses on FHA loans that go into default. Due to higher default rates in recent years FHA has been forced to increase the UFMIP premium to ensure the health and viability of the FHA loan program.

It is important that home buyers who are considering using an FHA loan be made aware of this change so that it does not come as a surprise to them late in the home buying process!

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Michigan Mortgage Market Update – The Economy is a State of Mind

I can’t speak for anybody else, but business is booming in my office right now! It’s a major twist since we have been slow to moderately slow for the past 18 months. We are financing people buying houses like crazy right now and some of that can certainly be attributed to the current home buyer tax credit. I sure hope that thing gets renewed! The bottom line is that it seems like the housing market has really picked up and that is great news for everyone in Southeastern Michigan! I am seeing buyers lose houses that have gotten multiple offers and that has not been typical for the past couple of years. Also, most homes are selling within a narrow range around the asking price of about 5% within our typical market area of Oakland, Macomb and Wayne Counties.

Mortgage rates have continued to stay very low with rates this year averaging between 4.875 and 5.250% and that has added fuel to home buying activity. Over the past couple weeks most of the economic news has been pretty benign – meaning it has had little impact on interest rates. Industrial production reported on Monday, March 15, was up .1% and February Housing Starts were down 5.9% both pretty much in line with expectations. The Federal Reserve met last week and announced that they would leave the Federal Funds rate unchanged for the foreseeable future. Later in the week the Producer Price Index and the Consumer Price Index (both measures of inflation) were pretty much flat. This is good news as inflation causes interest rates to rise. Arguably the most important factor affecting interest rates right now is excessive government borrowing. In order to finance the HUGE government deficit the fed’s have been issuing records amounts of new debt in the form of treasury bonds and notes. Today the federal government is selling a record $42 billion of 5 year notes and demand for this new debt has been low as there is a limit to how much US debt the world is willing and able to hold. The federal government needs to get a handle on this deficit spending or we are going to be in for significantly higher interest rates in the near future! If you want to keep up with news items that impact mortgage rates on a daily basis please read our Daily Market Advisory.

Overall, it seems like economic activity is starting to improve in my little corner of the world. Consumer spending and housing activity are the two biggest components impacting the economy and both have been on the mend this year. The economy is really just a reflection of the state of mind of consumers, so, let’s all think positively and encourage those around us to do the same and we’ll see the economy getting better which will in turn improve business profits which will create new jobs and more spending and things will continue to get back to “normal.”

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FHA ANNOUNCES IMPORTANT POLICY CHANGES BEGINNING IN APRIL 5, 2010!

Recently Federal Housing Administration (FHA) Commissioner David Stevens announced a set of guideline changes to the FHA loan program for the purpose of strengthening loan quality and shoring up FHA’s capital reserves. These are significant changes that will impact both the cost of getting an FHA loan and the down payment requirements as well as providing more strict oversight of FHA lenders. There are four primary changes that we are concerned with here:

1) Mortgage Insurance Premiums will be increased – FHA charges what’s known as an Upfront Mortgage Insurance Premium (UFMIP) on all FHA loans. The UFMIP is paid by the borrower and the cost is allowed to be rolled into the loan amount so borrowers don’t have to pay for it out of pocket. UFMIP premiums are pooled and this pool of funds is FHA’s Capital Reserve which is used to pay for losses on loans that go into foreclosure. Currently, UFMIP is 1.75% of the loan amount, so, for a $100,000 loan the cost of UFMIP is $1,750. Beginning April 5, 2010, UFMIP is going to increase to 2.25%, so for that same $100,000 loan the cost is going up to $2,250. The purpose of this increase is to strengthen the capital reserve fund to cover current losses on bad loans.

2) Increase the Minimum Down Payment Requirement – Currently FHA requires a minimum down payment of 3.5% of the purchase price of a home. The proposed change would require borrowers with credit scores of 580 to put a minimum 10% down. This change is really inconsequential as 95% of lenders today will not make an FHA loan to a borrower with a credit score under 620 anyway. The reason for this is that borrowers with credit scores under 620 have historically not performed well and FHA can hold the lender who made the loan responsible in the event the home goes into foreclosure and FHA is more likely to find fault in the underwriting process of the lender when the borrower clearly has a weak credit history. This change is scheduled to take place in early summer of 2010. There are also rumors going around that FHA may increase the minimum down payment requirement for all borrowers to 5%, but, we’ll just have to wait and see.

3) Reduce Allowable Sellers Concession from 6% to 3% - The Sellers Concession, otherwise known as Seller Paid Closing Costs, is a very important component of the FHA loan. Most FHA borrowers have only a limited amount of funds available to buy a home and the closing costs and prepaid items (property taxes and insurance) can really add up. Here in Oakland County, Michigan, a buyer purchasing a $150,000 home can expect typical prepaid items plus closing costs to add up to approximately $6,500 which is about 4.5% of the purchase price of the home. IF FHA will only allow the seller to pay 3%, or $4,500, then the buyer will have to spend an additional $2,000 out of pocket to purchase the same home! This change has not yet been approved but if it is it will go into effect this summer as well.

4) Increased Enforcement of FHA Lenders – The idea here is to push out lenders who are creating an excessive number of non-performing loans. FHA plans to publicly report lender performance rankings and to make lenders more responsible for loans they approve that go bad. This is a good idea because in order for the FHA program to work, loans that are approved need to perform – meaning the borrower makes their payments on time. This will have some negative impact though in that this type of stricter oversight by FHA will also cause FHA loan underwriters to become stricter making it difficult for more marginal borrowers to be approved. This change has actually already been implemented and FHA has shutdown 2 of the nation’s largest FHA loan underwriters in the past 6 months!

So, it looks like it’s going to become more costly to obtain an FHA loan, buyers may have to make larger down payments, sellers can’t pay as much of the buyers closing costs and lenders making FHA loans will be more careful about approving only those loans that have a strong likelihood of performing.

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