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Robert Nusgart: FHA refinancing plan doesn’t go far enough

They still don’t get it.

A couple of weeks ago, with much fanfare, the Obama administration rolled out a new program that would allow FHA borrowers who settled on a home before June, 1, 2009, to refinance to current lower mortgage rates without having to essentially pay the required one-time upfront mortgage insurance premium and to maintain their current monthly mortgage insurance.

On the surface, brilliant! Hats off to the administration for helping some people out.

Go beneath the surface, and it is just plain stupid.

Why stop at June 9, 2009? Home values were still dropping in 2009 and 2010 and 2011 in many areas. Why not try to figure out a formula that would allow all FHA borrowers refinance to lower rates?

Here’s the ongoing problem and here’s why the administration tried to help out some homeowners with a program that starts this June.

First, for those who are unfamiliar with how an FHA government-insured loan works, there are two mortgage insurance premiums charged to the borrower. The first is the one-time upfront premium that typically is rolled into the overall loan amount. The second is the annual premium that is sliced into 12 payments as a part of the overall mortgage payment.

Three years ago, the upfront mortgage insurance was calculated at 1.75 percent of the base loan amount. So it was $1,750 for every $100,000 of loan amount. The annual was calculated at 0.55 percent of the loan amount. So $550 per $100,000, spread out over 12 payments annually.

As the mortgage meltdown took place and 100 percent financing and low down payment loans disappeared and underwriting guidelines for conventional loans tightened in a flash, an FHA loan became the loan of last resort for millions of homebuyers.

Strains on requirements

That put strains on the capital requirements for FHA mandated by Congress. More originations. More defaults. Less reserves.

So in April 2010, the upfront mortgage insurance was raised to 2.25 percent. The annual remained unchanged. It changed again in 2011 when FHA bumped up the annual premium to 0.90 percent, which raised monthly payments for new FHA borrowers and those seeking to refinance.

But as a concession, FHA lowered the upfront mortgage insurance premium down to 1 percent.

Then last April it raised the annual again to 1.15 percent for most FHA loans.

This made it almost impossible for FHA borrowers to refinance and see real savings from lower interest rates because a new FHA mortgage eliminated the old — less costly — annual insurance and replaced it with the higher premium. The dollars and cents didn’t make sense. In addition, FHA required that there be a net tangible benefit to the borrower of 5 percent savings in new principal and interest payment as well as mortgage insurance payment over the old payment. Rarely did that formula work.

And now, with FHA case numbers of April 9, FHA is raising both the upfront (to 1.75 percent) and the annual to 1.25 percent. Simply, FHA is costing a lot more today than three years ago.

Whew!

Realizing this, the Obama administration had the idea of allowing those borrowers who settled prior to June 1, 2009, to refinance, while only charging .01 percent in an upfront premium and charging the old 0.55 percent annual premium.

Again on the surface, great! But if you really think about it, how many homeowners were taking out FHA mortgages in 2005, 2006 or 2007, or even in 2008? According to government data, FHA represented only 4.5 percent of all home sales in 2005; 4.5 percent again in 2006; and 6.1 percent in 2007. Finally, after the meltdown began, FHA accounted for 24.1 percent of all home sales in 2008.

Peaked in 2010

In 2009, 32.6 percent of all purchase originations were FHA, with the number peaking in 2010 at 40.02 percent. Through the first two quarters of 2011, the market share had dropped to 29.8 percent.

So what the numbers say is, while rates slipped from 5 percent to less than 4 percent over the last couple of years, there are millions of homeowners who took out FHA mortgages after the first quarter of 2009 who won’t be able to refinance because their new annual mortgage insurance wipes out any real savings.

My question is this:

If FHA is already insuring the mortgage with homeowners at lower annual mortgage insurance rate, why not allow them to maintain that premium and let them enjoy a new mortgage rate that might substantially lower their monthly payment? It doesn’t make sense.

I know why the administration picked June 1, 2009, as the cutoff and will start the refi program this June. That makes three years, and when an FHA borrower refinances to another FHA loan, they get a prorated rebate of the original upfront insurance until 36 months has passed.

Well, now the government won’t have to worry about the rebate, and smartly the government isn’t charging a new huge upfront premium for those who will be able to use the new refinance program.

My question is this:

Why couldn’t the government just allow borrowers to be charged a new upfront that would be equal to the rebate? That would be a wash.

I have to believe that there are smart people working at HUD who could figure out formulas so that all homeowners who have an FHA mortgage can enjoy these low rates while they last.

It’s time they figured it out once and for all.

Robert Nusgart is a loan officer with Mortgage Master Inc. in Baltimore. He can be reached at 443-632-0858 or by email at [email protected] Visit his website at www.RobertNusgart.com for the latest mortgage and financial news.