The Obama Administration this week announced a cost-cutting move to open the door to cheaper government loans for as many as 3 million borrowers.
Helping refinancing homeowners cash in on today’s rock-bottom mortgage rates, the Administration ordered the Federal Housing Administration to significantly cut costs on loans refinanced under the Federal Housing Administration’s (FHA) Streamline Refinance Program.
Effective June 11, 2012, for qualifying borrowers, the cost for the upfront mortgage insurance on FHA loans will be reduced to 0.01 percent of the loan amount, down from 1 percent, according to a White House fact sheet.
The annual mortgage insurance amount will be reduced from 1.15 percent to only 0.55 percent per year.
Qualifying borrowers must be current on an existing FHA-insured mortgage signed on or before May 31, 2009.
The new lender is not required to verify the homeowner’s income, employment or credit score. That could be risky, given the current state of the housing market can be attributed, in part, to so-called “no-doc” or “NINJA” (no income, no job or assets) loans.
Also, with no appraisal required, the homeowner can be underwater — owing more than the home is worth – another potential problem. Pre-crash borrowers often signed for mortgages larger than they eventually could afford.
According to the FHA, currently, 3.4 million households with loans endorsed on or before May 31, 2009, pay more than a five percent annual interest rate on their FHA-insured mortgages. By refinancing through the FHA’s streamlined process with the lower insurance costs and lower interest rates, borrowers could save an estimated $250 a month or $3,000 a year.
To offset the hit on its already shrunken mortgage insurance fund. FHA also announced it will increase its upfront premiums on most other loans by 75 basis points to 1.75 percent. In addition, FHA will raise annual premiums 10 basis points and 35 basis points on mortgages higher than $625,500.
FHA says the new discounts aren’t supposed to add risk to its insurance fund.
After the housing crash, FHA loans virtually replaced subprime mortgages and have accounted for as much as 50 percent of all purchase loans in some area. Before the housing collapse, FHA wrote only 3 percent of all home loans.
The FHA has taken steps to speed up foreclosure sales to pad its fund and it has cracked down on certain FHA lenders to reduce its exposure to risk, but in recent years, FHA loans became ever more costly to offset losses.
That appears to be changing.
“This is one way that FHA can make a real difference to help homeowners who are doing the right thing, paying their bills on time and want to take advantage of today’s low interest rates,” said Acting Federal Housing (FHA) Commissioner Carol Galante.
“By significantly reducing costs for these borrowers, we can make certain they cut their monthly mortgage burden which will benefit the housing market and the broader economy in the process,” Galante added.