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June 7th, 2012

Time to lower FHA mortgage insurance premiums?

by Peter Miller


Capitol Building 2Rep. Karen Bass, D-Calif., has introduced a proposal to establish a one-year pilot program that aims to cut up-front FHA mortgage insurance premiums.

The Homeownership Preservation Education Act of 2012 would reduce the up-front cost for first-time homebuyers who finance with FHA mortgages and complete a one-on-one class with an approved housing counselor. Under the act, the up-front mortgage insurance premium would be cut from the current 1.75 percent of the purchase price to 1.5 percent.

A 0.25 percent savings may not seem like a lot of money, but on a $200,000 mortgage, that translates into a savings of $500 at closing.

It’s unlikely that the Bass proposal will go far given our current political climate. At the moment, the FHA reserve fund has a lot less money than it should and therefore there’s a strong case to keep mortgage insurance premiums at the new and higher rates introduced in April.

It’s a good idea

That said, there is some reason to believe Rep. Bass is onto a good idea.

First, the years of actual losses to the FHA are behind us. That is to say that the losses which are showing up today are largely a result of loans made from the year 2000 through the first quarter of 2009. Since 2009, the FHA’s “Book of Business” has been positive. Loans originated over the past few years are expected to generate a substantial profit.

Second, the educational system does not devote a lot of time to such common-sense issues as checking accounts, credit cards, auto loans and real estate financing. It’s really not asking too much to expect that people who seek massive loans will take off a few hours to learn the fundamentals of mortgages.

Just one attraction of such classes should be the opportunity to learn how to compare mortgage products and pay less for a loan.

Analyzing the effort

After the pilot program ends, HUD is then supposed to send a report back to Congress analyzing how well the effort did or did not do.

An obvious result is that if you reduce the cost of mortgage origination you will attract some people who otherwise might not have qualified for financing or were previously uninterested in homeownership. In other words, reducing origination costs is like reducing mortgage rates—borrowers flock to lower rates.

Pilot programs have a way of staying in place for years if not decades. For example, he reverse mortgage program started out as a small demonstration program and it remains to this day.

Over time, pilot programs develop a following as well as lobbyists and special interests. At least in this case there would be a public benefit and by itself that may justify the idea.

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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