The U.S. Department of Housing and Urban Development, or HUD, recently released its monthly production report for June 2013 for mortgages underwritten to FHA guidelines.
Each month, this report tallies FHA loan production on a month to month as well as year-to-date basis. HUD has been on a mission over the past four years in an attempt to shore up its reserves after the financial crisis.
Fewer People Opting for FHA Loans
The production report showed that FHA loan applications fell precipitously from May to June. While monthly changes in application volume are normal, the most recent drop was not. FHA applications fell by nearly 50 percent from 182,400 in May to only 93,700 in June. And compared to June of 2012, applications for FHA loans totaled 181,801. So what’s going on?
Higher FHA Mortgage Insurance Premiums
We’ll have to look at additional data over the next few months to see if the drop was a blip or a trend. Still, a 50 percent decrease warrants some serious attention. The reason might be as simple as higher FHA costs.
FHA has raised insurance premiums so high that borrowers may be looking at alternative offerings from Fannie Mae and Freddie Mac.
The fact that borrowers are opting out of FHA is evidenced by a similar drop that occurred from March to April of this year. In March, total FHA applications were 221,600; in April, 118,200.
On April 1 2013, FHA implemented yet another mortgage insurance rate increase, the annual premium that borrowers pay monthly to 1.35 percent. FHA has increased this mortgage insurance premium five times over the previous two years.
Then on June 3, 2013, FHA mortgage insurance became payable for life in most cases. Prior to this date, FHA mortgage insurance could be cancelled in as little as five years.
These increases have apparently steered many borrowers away from FHA and into a conventional loan – or made them put their home buying plans on hold. There’s no way to tell at this stage what the resistance level will be if FHA prices itself out of the mortgage business but it looks like we’re getting close to some serious push-back.
Conventional Mortgage Insurance
FHA is not the only mortgage giant that requires mortgage insurance. Conventoinal mortgages underwritten to Fannie Mae and Freddie Mac standards require a private mortgage insurance policy for all loans that exceed 80 percent of the value of the home.
Private mortgage insurance, or PMI, is often less expensive than FHA mortgage insurance, especially when the borrower has good credit.
And, by law, PMI must be cancelled by the lender when the loan amount gets to 78% of the original purchase price or current appraised value. But this cancellation mandate doesn’t apply to FHA mortgage insurance.
Lifetime Mortgage Insurance
Could FHA’s new lifetime mortgage insurance mandate this be the cause for the drop in FHA applications? It would appear so. The annual FHA mortgage insurance premium of 1.35 percent equates to an additional $271 per month for a $250,000 purchase price. That seems like a lot but in return the borrowers only have to put 3.5 percent down. That’s why first time homebuyers who have trouble saving enough for a down payment have historically comprised anywhere from 75 to 80 percent of FHA borrowers.
Rising Interest Rates
Another reason for the drop in FHA applications is rising interest rates. The number of FHA streamline applications were over 56,000 in June 2013 but dropped to only about 19,000 in May.
As rates rise, fewer people are able to refinance. The monthly savings just don’t make sense if borrowers can’t drop their rate enough. For instance, someone with a 5% interest rate might save money by dropping their rate to 4%. But if 4.625% were the lowest rate they can get, they would probably opt out of the refinance.
FHA has gone out of their way to drive more home buyers to other programs, like conventional loans, USDA, or VA. As the mortgage market tightened up after the 2008 housing crisis, FHA became the program of choice for most first time home buyers. But as many of these home buyers default on their loans, FHA is stuck with sizeable losses.
We may see FHA applications bounce back somewhat in 2014. But if the Federal Housing Adminstration has its way, the FHA program will play a much smaller part in the mortgage market in the latter half of the 2010’s.
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Tim Lucas (NMLS #118763), Contributor/Editor
Tim Lucas is a mortgage writer with over 11 years of experience as a loan originator, processor, and team manager. Get a live rate quote for your home purchase or refinance at MyMortgageInsider. Visit Tim on Google+, Twitter, and Facebook.