FHA mortgages are supposed to be a vanishing species but the use of such financing is actually on the rise despite higher costs and tougher terms.
The latest figures from HUD show that so far this year the FHA has insured 1.06 million “forward” loans — a figure that compares with 850,000 mortgages during the same period in 2012. As to reverse loans, to this point just 44,282 have been originated versus 98,959 last year.
Why the use of FHA loans is increasing seems curious: In 2012 the up-front mortgage insurance premium jumped from 1 percent to 1.75 percent while the annual mortgage insurance cost grew to 1.25 percent. For borrowers taking out an FHA-insured loan for more than $625,500 the annual fee is now 1.5 percent.
It used to be that borrowers could cancel the annual insurance premium, but that policy has now been reversed for new FHA loans and the premium continues for the life of the loan. In effect, it is potentially a much-higher cost.
It usually happens that sales do not increase when prices go up and yet we're seeing more FHA mortgages. The reason is that while the costs for new financing have increased it's really cheap and easy to get FHA loans refinanced.
How cheap? HUD reduced the up-front charge to refinance from 1 percent to .01 percent.
The result is that new FHA originations are down by about 20,000 loans so far this year when compared with 2012 while refinancing has increased by almost 220,000 mortgages.
For most FHA borrowers refinancing is an opportunity to shake-off older and higher rates for interest levels which are far below historic averages.
However, rising FHA loan numbers hide a substantial problem: The FHA really needs new loans more than older ones. The reason is that each new mortgage brings in a hefty up-front fee that can be added to FHA reserves, reserves depleted by foreclosure claims from loans made between 2000 and 2008. How much extra? Some $20 billion between 2009 and 2012.
So what can the FHA do to pump up new loans? Why not open the FHA program to investors? Especially for those who buy distressed properties.
Every foreclosure, short sale and REO absorbed by investors reduces the inventory of distressed homes and thus pressures home values higher. That's good for everyone, but it is especially good for mortgage-insurance programs such as the FHA. Rising home values are the surest way to stabilize FHA reserves because when homes can be sold for more than the mortgage debt there are no claims.
Real estate equity grew by $784 billion in the first quarter according to the Federal Reserve, and a good portion of that increase was the result of more real estate demand. Having more investors in the mix would simply mean more folks looking for property, not a bad idea when one considers that despite good news during the past year home values have yet to reach the peak seen in 2007.
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