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FHA Set To Increase Annual Mortgage Insurance Premium

Published Friday, 6th August 2010 02:18 am - © 2010 Dow Jones

(Updates with comments from FHA Commissioner Dave Stevens throughout)

By Jessica Holzer


WASHINGTON -(Dow Jones)- The Obama administration, in an effort to shore up the Federal Housing Administration's finances, is set to increase the annual premium the agency charges borrowers for mortgage insurance.

Under a measure that cleared Congress this week, the FHA would get authority to raise its annual premium to 1.55% from the current 0.55% on most of the home loans it insures. President Barack Obama is expected to sign the bill into law.

The FHA doesn't make loans; it backs mortgages for borrowers who pay a minimum 3.5% downpayment and meet the agency's other standards.

The administration argues the premium hike will allow the FHA to rebuild its capital more quickly than it otherwise would. The agency has seen its capital reserves plunge to razor-thin levels after it took on an outsized role since the housing bust.

"Getting the authority to raise the premiums is critical to getting the capital levels back where they need to be," FHA Commissioner Dave Stevens said in an interview.

Stevens has said he will use the new authority to raise the annual FHA premium to around 0.90%. The FHA will then lower the upfront premium to around 1%, following an increase in that premium to 2.25% from 1.75% earlier this year.

The administration is also pushing Congress to pass legislation giving the FHA tools to shield its insurance fund from losses on fraudulently or poorly underwritten loans. The changes, which were approved by the U.S. House, were introduced this week in the Senate.

The FHA estimates the higher premiums will generate about $300 million a month in additional positive receipts to its insurance fund, while costing the average FHA borrower $42 extra in monthly premium payments.

Still, Stevens said the FHA may not be able to rebuild its reserves to congressionally mandated levels any sooner than 2013, the same date predicted by a company auditing the FHA's insurance fund last year. Rising claims on insurance fund driven by the still-fragile housing market could offset the inflow from the higher premiums.

"I remain cautious because the big uncertainty is what house prices are going to do," Stevens said.

The FHA's business has ballooned during the housing bust as home buyers have struggled to get conventional financing. The agency's market share rose to about one-third of the mortgage market last year, up from 2% in 2006. Together, the FHA and government-run mortgage insurers Fannie Mae (FNMA) and Freddie Mac (FMCC) are providing backing for more than 95% of new U.S. mortgages.

In an effort to shore up its finances, the FHA has expelled more than a thousand lenders from its program in recent months and tightened its credit standards. For example, it now requires borrowers with down payments of less than 10% to have credit scores of at least 580.

Still, many critics argue the agency needs to go much further if it wants to avoid a taxpayer bailout. House Republicans pushed unsuccessfully earlier this year to raise the minimum FHA downpayment to 5%.

Stevens said the higher premiums are "a significant step" for attracting private capital back to the mortgage market because private mortgage insurers were having difficulty competing with the government's pricing.

But he acknowledged that, in the current environment, the private sector doesn't have much appetite for mortgage risk.

According to Mortgage Bankers Association Senior Vice President Steve O'Connor, "The FHA is still going to be the only game in town in the near term for lower-income and cash-strapped borrowers."

-By Jessica Holzer, Dow Jones Newswires; 202-862-9228;

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