FHA Increases Annual Mortgage Insurance Premium

In a mortgagee letter (ML 2010-28) released this week, FHA announced it will raise the annual mortgage insurance premium (MIP) and lower the upfront MIP for most FHA loans assigned on or after October 4, 2010.

The decision follows the passage of H.R. 5981, signed by the President on August 12, which gives HUD the authority to raise the maximum allowable annual MIP for mortgages below 95 percent of value from the current 0.50 percent to 1.50 percent; and for mortgages at or above 95 percent of value from the current 0.55 percent to 1.55 percent.  The law also authorizes the HUD Secretary to adjust the amount of any initial or annual MIP through a notice published in either the Federal Register or in a mortgagee letter.

Although the new law raised the statutory ceiling for the annual MIP by 100 basis points, FHA will not increase the premiums by this amount at the outset. Instead, FHA will raise the annual MIP fee to 0.85 percent for new borrowers who have 5 percent equity and 0.90 percent for those with less than 5 percent equity.  At the same time, FHA will lower the upfront MIP fee from 2.25 percent to 1.00 percent.

FHA estimates that new borrowers will pay an average of $38 more each month under the increased annual MIP, and expects the change to raise about $3.6 billion annually.

At the end of 2009, FHA had capital reserves equal to 0.53 percent of the value of the outstanding home mortgages it insures, well below the 2 percent threshold required by law.  In addition to boosting the agency’s capital reserves, increasing the annual fees will give the agency a cash infusion and align its fee structure with that of private mortgage insurers, according to FHA Commissioner David Stevens.

FHA will also increase the annual premiums for Home Equity Conversion Mortgages (HECM) to 1.25 percent, up 75 basis points from the previous annual MIP at 0.50 percent. This increase will be in effect for all HECMs for which the case number is assigned on or after October 4, 2010. This policy change will not affect the upfront premiums collected for HECMs, currently at 2 percent.