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FHA Changes: Another Blow to the Weakened Housing Market?

November 9, 2010 by MSI

The recent changes in the Federal Housing Administration (FHA) insurance premium could put the ‘American Dream’ on hold for even more potential homebuyers. The FHA reserve fell to a dangerously low level of only 0.53% of its insurance guarantees, far below the 2% required by Congress and the 3% that it carried as recently as last year. These reserves are meant to be used for covering the increasing amount of defaults, currently 14% of all FHA loans as of 9/30/10.

The change in the mortgage insurance premium charged to borrowers will bolster this guarantee fund and bring it up to the federally mandated levels. However, this will impact buyers financing through FHA as the annual premium charged to these borrowers will increase by approximately 30% for those with loan to value ratios up to and including 95%. Those borrowers with a loan to value ratio above 95% will see the annual premium increase by nearly 50%.

The good news is that the upfront mortgage insurance premium for both scenarios will decrease from 2.25% to 1.0%. This move may actually help bring back the mortgage insurance premiums of the past on conventional loans for low down payment buyers. As always, when there is a demand, someone will be there to meet it with a product. In this case, it may simply be dusting off one that had been shelved for a few years. Either way, millions of Americans (both buyers and sellers) are hoping that this latest FHA change will not deal another blow to an already weakened housing market.