(originally posted on October 2nd, 2010)
I have had this rolling around in my head for a few weeks now, and with the change in FHA mortgage insurance monthly premiums bearing down on us in a few days, I had to share my thoughts. We’ve been doing a lot of FHA loans in Oregon & Washington, as I’m sure is the case all around the country, and this change is going to affect a lot of people. (I apologize for the low quality of the video, I have successfully screwed my phone’s camera up!)
Again, everything that’s changing about the mortgage industry is done under the auspices of avoiding another meltdown, curbing foreclosures, and making the mortgage-backed security a good investment. So, if you have an insurance policy which is designed to avert the risk of a loan in default to the lender, why would you want the premium on that insurance policy to be collected over time?
From a simple risk-assessment perspective, it would seem that the more time you are exposed to loss, the greater the likelihood that it will happen. The fear is that homeowners will default on their loan payments, so why would you push more of the premium to the monthly payment side (rather than the upfront funding fee) if the reason for the policy is to protect the investor from people who default on those payments?
It seems like the reasonable position would be to get the premium covered from day one. This reminds me of when the downpayment requirement for FHA went from 3% all the way up to a whopping 3.5 per cent. Does that extra .5% really invest the homeowner so much more that it reduces their likelihood of default? I’m not saying their should be less “skin in the game”, but if that’s going to be your approach, why not really DO IT? Make the downpayment 5%, or make some portion of the upfront mortgage insurance on an FHA home loan payable from the borrower’s own funds?
It may just be that I am making the age-old mistake of applying logic to government policy, but I am thinking that the intended purpose isn’t really what we are being told.
You can read some related posts on FHA loans and mortgage insurance:
We can do FHA down to 580 FICO, but should we?
Video: mortgage terminology – mortgage insurance
If you have any questions about FHA financing, mortgage insurance, or home loans in general, feel free to send us an email or comment on this post! And if you have any thoughts on why the monthly mortgage insurance premiums for FHA mortgages are increasing while the upfront funding fee is decreasing, we’d love to hear them!
- It’s official – FHA has formally announced the mortgage insurance changes for FHA loans (annarborundressed.com)
- FHA Mortgage Insurance Premium Changes Made Official (fhaloanadvice.com)
- FHA To Increase Mortgage Insurance Premiums Nearly 64% – Prospective Buyers Tip (chicagonow.com)
- FHA Raising Annual Mortgage Insurance Premiums (fhaloanadvice.com)
- FHA Mortgage Insurance fees changing Oct 4th (seattlecondosandlofts.com)
- FHA 2010 Mortgage Guidelines (brighthub.com)
- FHA Feature: FHA is Changing…What is the Upside? (pinkbananaworld.com)
- Mortgage Definition: FHA 2/1 Buydown (zillow.com)