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FHA Insurance Hikes Lead To National Decline

FHA Insurance Leads to National Decline in FHA loans

FHA Insurance Leads to National Decline in FHA loans.

Orange County, CA – The dominant source of low-down-payment mortgages for the past several years has been the Federal Housing Association — but that’s on the verge of changing. FHA loans are on a downslide in Orange County (and country-wide, actually.)  Why? There’s a couple of reasons.

FHA Insurance Premiums Are Rising

Technically, the FHA doesn’t ever give a loan — what they do is insure loans that other lenders make against being defaulted on. If the FHA insures a loan, the bank is much more likely to give it to you, because the FHA is essentially guaranteeing that they won’t lose big on the deal.

As FHA insurance premiums rise, the banks naturally pass those costs directly on to the borrower in the form of increased mortgage payments. In other words, the more the FHA charges to insure loans, the fewer people will be able to afford a loan with FHA insurance.

FHA Insurance Premiums Remain For the Entire Term of Your Loan

Until June 3rd, if you managed to pay your mortgage down to 78% of it’s base value, the FHA would cancel your mortgage insurance premiums on the assumption that you’ve proven yourself enough of a regular payer that your risk has already essentially minimized itself.

Come the 3rd of June, however, that cancellation went away, and FHA insurance premiums will last for entire duration of your mortgage. That’s a significantly longer period of time to have to pay. It will keep your mortgage payments higher raising the total cost of the loan.

Creaming the Crop

These changes will naturally lead to private insurers offering mortgage insurance that competes with the FHA’s.  But this will only be available for the best of the FHA’s current customer base taking only the ‘cream’ and leaving the FHA with the less-qualified customers. Private insurers will pluck up the low-credit-risk, 720+ FICO score borrowers that bring up the FHA’s books and allow them to take on higher-risk, lower-score borrowers in the same way that healthy people make it less expensive to have unhealthy people on the same insurance policy.

If that trend continues, the FHA will end up insuring a generally lower quality of borrower and may, eventually, have to resort to raising fees again or other complications in order to make up the difference from those borrowers who do default. On the other hand, that may be the point — FHA Commissioner Carol J. Galante, when asked what she’d like the FHA’s market share to be, said “around 10 percent” — compared to the 14.6% market share they had in 2012.

That might not seem like much to the average homebuyer, but demographics play a big role here: in 2012, 50% of African-American buyers used FHA loans, and 40% of Hispanic and Latino buyers did as well. How those markets will fare if the FHA’s total market share drops by almost a third is a significant question.

The One-Size-Fits-All Effect

One of the most significant problems with FHA loans is that there’s exactly one pricing structure, and you either qualify for it or you don’t. Private insurers don’t have this governmental quality, and can offer plans that poach the FHA’s better customers by offering them better deals than the FHA’s one-size-fits-all plan.

Furthermore, the same 78%-loan-to-value premium cancellation that the FHA revoked is Congressionally guaranteed if you get a privately-insured mortgage. It’s enough to make some insurers advertise: “Isn’t it time to ask why you’re still using FHA?” 

For many buyers, particularly around Orange County, it’s a good question. Contact us to see what alternative options you have.

Scott Storace

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