FHA Ends Risk-Based Pricing, Hikes Fees By 25 Basis Points

The Federal Housing Administration (FHA) made good on its warnings to Congress that the suspension of risk-based premium pricing on its loan guarantees would lead to higher fees – the agency has announced that a year-long hiatus from the rules, effective October 1, will be coupled with an increase of 25 basis points for all borrowers.


In May, the Department of Housing and Urban Development (HUD) announced it would begin a risk-based pricing structure on July 14 to allow borrowers with good credit to pay as little as 1.25% while higher-risk borrowers would pay up to 2.25%.

HUD argued that the change would help troubled subprime borrowers with an even more flexible pricing structure to let even more borrowers participate in the program without forcing taxpayers to assume more risk of losses.

However, the sweeping housing bill known as the Housing and Economic Recovery Act of 2008 contained provisions that would override that decision.

Signed into law by President Bush last month, the housing package called for a one-year moratorium on that pricing system, as protests about the need for fee hikes by the FHA were countered by questions about the fairness of the rules in practice.

The bill also raises the requirement for minimum down payments on FHA-backed loans from 3% to 3.5% and creates a source of funding through seller-funded down-payment-assistance programs, effective October 1.

With the suspension of the risk-based rules at that time, the FHA said it will raise its mortgage insurance fee from 1.5% to 1.75% for new mortgages and full-credit qualifying refinances.

Under the new rules, a borrower with a $200,000 loan would be forced to pay a fee of $3,500, up from $3,000, regardless of their credit history.

Troubled borrowers looking to refinance under the FHASecure program will face a 75-basis-point jump in their upfront premium, which will increase to 3%.

Mortgages that are assigned FHA case numbers between July 14 and September 30 will use the risk-based premium structure for the life of the mortgage, according to FHA Commissioner Brian Montgomery.

FHA case numbers which are assigned after that period will be given an upfront premium charge set at 1.75%, while streamlined refinances will require a 1.5% upfront premium.


Posted on Friday, August 29, 2008 by staff