Federal Housing Administration to Cut Mortgage Insurance Premium

Blog posted On January 11, 2017

The Federal Housing Administration announced a plan to reduce mortgage insurance premiums in order to make mortgage financing more accessible.  Borrowers who close FHA mortgages after January 27 will pay 25 basis points less for their mortgage insurance premium which affects their monthly housing payment for the life of the loan, adding up over time. For example, on a $300,000 loan with a 3.5% down payment the new monthly insurance premium would be only $137.50 per month compared to the old premium of $200. This can save new home buyers $750 per year. 

FHA loans are available for home buyers that are unable to afford a traditional 20% down payment.  The FHA requires mortgage insurance for all if its loans issued to fund a reserve account that protects against the losses from defaults and foreclosure.  

"After four straight years of growth and with sufficient reserves on hand to meet future claims, it's time for FHA to pass along some modest savings to working families," said Housing and Urban Development Secretary Julián Castro.

Congress requires the FHA to have enough reserves to cover projected losses over 30 years and maintain the fund’s net worth of at least 2% in its loan portfolio.  The FHA announced the reserve ratio was at 2.32% in 2016, and had exceeded the 2% threshold for two years.  Since 2012, the FHA has gained $44 Billion in value as a result of a strong, healthy economy. 

The change does have the potential to be reversed when President-elect Donald Trump takes office.  Opponents of the premium cut argue that past mortgage insurance premium reductions put taxpayers at risk.  For example, in 2013 the FHA fell short in covering losses and had to receive a cash bailout of $1.7 Billion.  The fee cut may also hurt bond investors as borrowers are able to repay their mortgage loans more quickly.

This is the second cut in insurance premiums following a 50 bps reduction in January 2015.  The cut in mortgage insurance premiums may offset the impact of rising interest rates on FHA borrowers.  Mortgage interest rates have experienced a steady increase since the presidential election and the Federal Open Market Committee rate hike. 

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Sources: CNBC, Bloomberg, MarketWatch