by Tim McLaughlin,VP Weichert Financial Services
Over the past couple of years, we are seen a drastic shift in the amount of loans being originated to FHA guidelines vs. Fannie/Freddie guidelines. To the average borrower, they may not even know what program they are being originated into, much less care…they are just looking for the best structure in terms of qualification and cost.
Two of the main drivers (out of many) pushing the business toward FHA vs. conventional (Fannie/Freddie) are rules around down payment and the ultimate cost of the mortgage insurance.
All loans with a down payment of less than 20% require mortgage insurance, although the cost and provider of the mortgage insurance is driven by different sources.
On Fannie/Freddie loans, they do not self insure the loans. Instead, they defer the insurance (risk) to private mortgage insurance companies like United Guaranty or Radian to provide the required insurance, for an insurance fee. On FHA loans, the insurance is provided from within, so they in effect self-insure the loans, again, for an insurance fee. The cost of this insurance fee is one of the attributes that makes up the all in price of your loan payment.
Related to the cost of mortgage insurance, the House of Representatives voted last Thursday to approve, by a 406-4 vote, the Federal Housing Administration Reform Act, designed to add more financial strength to the FHA. Within this reform, the FHA now has the authority to raise the ceiling on the annual premiums it charges borrowers for the FHA guarantee and raises the limits on multifamily housing in certain high cost communities, among a few other things. In early April the upfront premiums went from 1.75 percent to 2.25 percent, but the annual premium remained unchanged at that point. Now, with this new measure, the FHA has the ability to increase its annual premium to 1.50 percent of the unpaid balance of the loan. This shift will allow for the capital reserves to increase because the annual MIP is paid over the life of the loan instead of at the time of closing. The net effect of this change will be determined over time.
One thing this does do, however, is give us an opportunity to reexamine the Fannie/Freddie vs. FHA best execution for loans with a down payment of less than 20%. With FHA MIC (insurance) premiums going up, this is a direct inverse relationship to the Fannie/Freddie MI premiums, which have been coming downward. Regardless if you are paying a monthly premium, or if you opt for our MI Advantage program where we pay the whole premium upfront for you, now there are potential costs saving options available. Ask us to help you work the numbers today!
Secondary Marketing Takeaways: As we enter the summer months, we are seeing trading volumes and activity slow down (as it usually does), which is not necessarily bad news for interest rates, as we are still at historic lows. Global economic events, like the situation in Greece, the BP scenario, and other TBD events will probably drive the market more than economic data.
